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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 off.
Far less glamorous but equally uncertain, bitcoin mining is done by high-definition computers which solve complex computational science issues (read: so complex they cannot be solved by hand). The luck and work demanded by a computer to solve one of those 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 intricate math issues on the bitcoin networkthey create new bitcoin, not unlike when a mining operation extracts gold in the ground. And second, by solving computational mathematics issues, bitcoin miners create the bitcoin payment network dependable and protected, by verifying its transaction information. .
Theres a good chance all that only made so much sense. In order to explain how bitcoin mining works in detail, lets begin with a process thats just a little 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 usage of counterfeit currency. .
Even electronic payments using the U.S. dollar are backed with a central authority. When you make an online order using your debit card or charge card, for example, that transaction is processed by a payment processing company like Mastercard or Visa. In addition to recording your transaction history, these companies affirm that transactions are not fraudulent, which is one reason that your credit or debit card could be suspended while traveling. .
Bitcoin, on the other hand, is not regulated by a central authority. Instead, bitcoin is endorsed by millions of computers throughout the world called miners. This network of computers plays the same function as the Federal Reserve, Visa, and Mastercard, but using a couple of 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 made in-store and online are documented by banks, point-of-sale systems, and physical receipts. Bitcoin miners achieve the exact same effect without these institutions by clumping transactions together in cubes and adding them into a public record called the blockchain. .
When bitcoin miners put in a new block of transactions to the blockchain, part of the job is to make sure that those transactions are accurate. (More on the wonder of how this happens in a second) In specific, bitcoin miners be sure that bitcoin are not being duplicated, a unique quirk of digital currencies called double-spending.
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Once you spend $20 in the shop, that Full Report bill is in the clerks hands. With electronic currency, however, it's a different story. .
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If the numbers were identical, the clerk could know the money had been duplicated. This analogy is similar to what a bitcoin miner does when they verify new transactions. .
With as many as 600,000 purchases and sales occurring in a single day, however, verifying each of these transactions can be a great deal 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 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 is 12.5, and sometime in the middle of 2020 it will halve to about his 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 precious over time but also more costly for miners to make.
Here's the catch. In order for bitcoin miners to really earn bitcoin from index verifying transactions, two things must happen. First, they must verify 1 megabyte (MB) value of transactions, which can technically be as small as 1 transaction but are far more often a few thousand, depending on how much information each transaction shops.