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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 done by high-definition computers which solve complex computational science issues (read: so complicated 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. First, when computers resolve these complex math 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 make the bitcoin payment network trustworthy and protected, by verifying its transaction information. .
Theres a fantastic chance all 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 trust printed currencies, at least in the United States. Feeling 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, 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, 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 endorsed by millions of servers throughout the world known as miners. This network of computers plays the identical function as the Federal Reserve, Visa, and Mastercard, but with a couple of 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 systems, 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, part of their job is to make sure that these 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 in the shop, that bill is in the clerks hands. With electronic currency, however, it's 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 confirm new transactions. .
With as many as 600,000 purchases and sales occurring in a single day, nevertheless, verifying every one of these 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 awarded bitcoin whenever they add 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 middle 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 precious over time but also more expensive for miners to make.
Here's the catch. In order for bitcoin miners to really earn bitcoin from verifying transactions, two things have to occur. To begin with, they must verify 1 megabyte helpful resources (MB) value of transactions, which can technically be as little as 1 transaction but are far more often a few thousand, depending on how much information each transaction shops.