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Chances are you listen to 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-definition 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 these 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 networkthey produce new bitcoin, not unlike when a mining operation extracts gold in the ground. And second, by solving computational math issues, bitcoin miners make the bitcoin payment network dependable 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 works in detail, lets begin with a process thats a tiny 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. Feeling because the U.S. dollar is backed by a central bank called the Federal Reserve. In addition to a bunch of additional responsibilities, the Federal Reserve regulates the production of new money and prosecutes the usage of counterfeit currency. .
Even digital payments using the U.S. dollar are backed with a central authority. When you make an online purchase using your debit card or charge card, for instance, 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, which is one reason that your credit or debit card may be suspended while traveling. .
Bitcoin, on the other hand, is not regulated by a central authority. Instead, bitcoin is backed by millions of computers across the world called miners. This network of computers plays the same function as the Federal Reserve, Visa, and Mastercard, but with a couple of key 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 purchase using bitcoin, we call that a transaction. Transactions generated in-store and online are documented by banks, point-of-sale systems, and physical receipts. Bitcoin miners achieve the same effect with no institutions by clumping transactions together in cubes and adding them to a public record called the blockchain. .
When bitcoin miners add a new block of transactions to the blockchain, a part of the job is to ensure that these transactions are true. (More on the magic of the way this happens in a second.) In specific, bitcoin miners be sure 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, click that invoice is in the clerks hands. With electronic 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 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 those transactions can be a lot 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 had been 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 total number of bitcoin in circulation will approach a limit of 21 million, making the currency more scarce and valuable over time but also more costly for miners to produce.
Here's the catch. In order to get bitcoin miners to really 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 information each transaction shops.