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Chances are you hear the term bitcoin mining and your mind begins to wander to the Western fantasy of pickaxes, dirt, and striking it rich. As it turns out, that analogy isnt too far off.
Far less glamorous but equally uncertain, bitcoin mining is done by high-powered computers that solve complex computational science issues (read: so complicated that they cannot be solved by hand). The fortune and work required by a computer to solve one of those problems is that the equivalent of a miner striking gold in the ground while digging in a sandbox.
The result of bitcoin mining is twofold. First, when computers solve these intricate math problems on the bitcoin networkthey produce new bitcoin, not unlike when a mining operation extracts gold from the ground. And second, by solving computational mathematics issues, bitcoin miners make the bitcoin payment network trustworthy and secure, by verifying its transaction information. .
Theres a fantastic chance all of that only made so much sense. In order to explain how bitcoin mining functions in detail, lets begin with a process thats just a tiny bit closer to home: the regulation of printed currency.
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Consumers tend to anticipate printed currencies, at least in the United States. Feeling because the U.S. dollar is backed by a central bank known as the Federal Reserve. In addition to a host of other responsibilities, the Federal Reserve modulates the production of new money and prosecutes the use of counterfeit currency. .
Even digital payments using the U.S. buck are backed with a central authority. When you make an online order using your debit or credit card, by way of instance, that transaction is processed by means of a payment processing company such as Mastercard or Visa. In addition to recording your transaction history, these companies affirm that transactions are not fraudulent, and that's one reason your credit or debit card may be suspended while traveling. .
Bitcoin, on the other hand, is not controlled by a central authority. Instead, bitcoin is backed by millions of servers throughout the world called miners. This network of computers performs the same function as the Federal Reserve, Visa, and Mastercard, but using a few key differences. Like the Federal Reserve, Visa, and Mastercard, bitcoin miners record transactions and check their accuracy.
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When someone makes a purchase or purchase using bitcoin, we predict that a transaction. Transactions generated in-store and online are documented by banks, point-of-sale methods, view it and physical receipts. Bitcoin miners achieve the same effect without these institutions by clumping transactions together in blocks and adding them to a public record called the blockchain. .
When bitcoin miners add a new block of transactions to the blockchain, part of the job is to ensure that those transactions are true. (More on the wonder of the way this happens in a second.) In particular, bitcoin miners make certain that bitcoin are not being duplicated, a unique quirk of digital currencies known as double-spending.
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Once you spend $20 in the store, that bill is in the clerks hands. With digital currency, however, it is a different story. .
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When the numbers were identical, the clerk would know the money had been duplicated. This analogy is similar to what a bitcoin miner does when they verify new transactions. Continued .
With as many here are the findings as 600,000 purchases and sales occurring in a single day, however, verifying every one of these transactions can be a lot of work for miners, which gets at one other key difference between bitcoin miners and the Federal Reserve, Mastercard, or Visa. As compensation for their efforts, miners are awarded bitcoin whenever they add a new block of transactions to the blockchain.
In 2009, it had been 50. In 2013, it was 25, in the time of writing it's 12.5, and sometime in the center of 2020 it will halve to 6.25. .
At this speed of halving, the entire number of bitcoin in circulation will approach a limit of 21 million, making the currency more scarce and precious over time but also more costly for miners to produce.
Here's the catch. In order for bitcoin miners to actually earn bitcoin from verifying transactions, two things have to occur. First, they must confirm 1 megabyte (MB) value of transactions, which can technically be as little as 1 transaction but are more often several thousand, depending on how much data each transaction stores.