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Chances are you hear the phrase bitcoin mining and your mind begins to wander to the Western fantasy of pickaxes, soil, and striking it rich. As it turns out, that analogy isnt too far away.
Far less glamorous but equally uncertain, bitcoin mining is performed by high-powered computers that solve complex computational math problems (read: so complex they cannot be solved by hand). The luck and work demanded 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 resolve these intricate mathematics problems on the bitcoin network, they produce new bitcoin, not unlike when a mining operation extracts gold from the ground. And second, by solving computational math problems, bitcoin miners create the bitcoin payment network trustworthy and secure, by verifying its transaction information. .
Theres a good chance all of that only made so much sense. In order to explain how bitcoin mining works in greater detail, lets begin with a procedure thats just a little bit closer to home: the regulation of printed currency.
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Consumers tend to trust printed currencies, at least in the United States. Thats because the U.S. dollar is backed with a central bank called 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 purchase using your debit or charge card, by way of instance, that transaction is processed by a payment processing company such as Mastercard or Visa. In addition to recording your transaction history, these companies verify that transactions are not fraudulent, and that's one reason that your debit or credit card could be suspended while traveling. .
Bitcoin, on the other hand, is not regulated by my blog a central authority. Instead, bitcoin is endorsed by millions of computers throughout the world known as miners. This network of computers performs the identical function as the Federal Reserve, Visa, and Mastercard, but with a few important 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 sale using bitcoin, we predict that a transaction. Transactions made in-store and online are documented by banks, point-of-sale systems, and physical receipts. Bitcoin miners achieve the exact same effect with no institutions by clumping transactions together in cubes and adding them to a public record called the blockchain. .
When bitcoin miners put in a new block of transactions to the blockchain, a part of the job is to ensure that these transactions are accurate. (More on the magic of the way this happens in a second) In specific, bitcoin miners make sure that bitcoin are not being reproduced, a unique quirk of electronic currencies called double-spending.
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Once you spend $20 in the shop, that bill is in the clerks hands. With digital currency, nevertheless, it's a different story. .
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If the numbers were identical, then the clerk could know the money had been replicated. This analogy is very similar to what a bitcoin miner does when they confirm new transactions. .
With as many as 600,000 purchases and sales occurring in a single day, nevertheless, verifying every one of those 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 given bitcoin whenever they include a new block of transactions to the blockchain.
In 2009, it was 50. In 2013, it had been 25, in the time of writing it's 12.5, and sometime in the middle 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 really earn bitcoin from verifying transactions, two things must happen. To begin with, they need to confirm 1 megabyte (MB) value of transactions, which can theoretically be as little as 1 transaction but are far more often a few thousand, depending on how much data each transaction stores.