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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 off.
Far less glamorous but equally uncertain, bitcoin mining is performed by high-powered computers which solve complex computational science issues (read: so complicated that they cannot be solved by hand). The luck and work demanded by a computer to solve one of these problems is the equivalent of a miner striking gold in the ground while digging in a sandbox.
The end result of bitcoin mining is twofold. To begin with, when computers solve these complex mathematics problems on the bitcoin network, they create new bitcoin, not unlike when a mining operation extracts gold in the ground. And second, by solving computational mathematics 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 functions in detail, lets begin with a procedure 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. Thats because the U.S. dollar is backed with a central bank known as the Federal Reserve. In addition to a bunch 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 credit card, for example, that transaction is processed by a payment processing company like Mastercard or Visa. In addition to recording your transaction history, those 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 their website hand, is not regulated by a central authority. Instead, bitcoin is backed by millions of servers across the world called miners. This network of computers performs the same 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 assess their accuracy.
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When someone makes a purchase or sale using bitcoin, we call a transaction. Transactions made in-store and online are documented by banks, point-of-sale methods, and physical receipts. Bitcoin miners achieve the same effect without these institutions by clumping transactions together in cubes and adding them into a public record known as the blockchain. .
When bitcoin miners put in a new block of transactions to the blockchain, a part of their job is to ensure that those transactions are accurate. (More on the wonder of the way this happens in a second) In specific, bitcoin miners be 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 at the shop, that bill is More about the author in the clerks hands. With electronic currency, however, it is a different story. .
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If the numbers were identical, the clerk could know the money had been duplicated. 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 each of these transactions can be a great deal of work for miners, which gets at one other crucial 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 had been 50. In 2013, it was 25, at the time of writing it is 12.5, and sometime in the center of 2020 it will halve to 6.25. .
At this rate of halving, the entire number of bitcoin in circulation will approach a limit of 21 million, making the currency more scarce and valuable over time but also more expensive for miners to produce.
Here's the catch. In order for bitcoin miners to really earn bitcoin from verifying transactions, two things must occur. To begin with, they must verify advice 1 megabyte (MB) worth of transactions, which can technically be as little as 1 transaction but are far more often several thousand, depending on how much data each transaction stores.