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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, dirt, 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 complex 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 math issues on the bitcoin network, they create new bitcoin, not unlike when a mining operation extracts gold from 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 functions in greater detail, lets begin with a process thats 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 host of other responsibilities, the Federal Reserve regulates the production of new money and prosecutes the use of counterfeit currency. .
Even electronic payments using the U.S. dollar are backed by a central authority. When you make an online purchase using your debit or credit card, for example, that transaction is processed by means of a payment processing company like Mastercard or Visa. In addition to recording your transaction history, these companies verify that transactions are not fraudulent, and that's one reason your debit or credit card could be suspended while traveling. .
Bitcoin, on the other hand, is not controlled by a central authority. Instead, bitcoin is endorsed by millions of computers across the world known as miners. This network of computers plays 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 check their accuracy.
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When someone makes a try this site 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 to a public document 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 true. (More on the magic of how this happens in a second) In particular, bitcoin miners be sure that bitcoin are not being duplicated, a unique quirk of electronic currencies known as double-spending.
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Once you spend $20 at the shop, that bill is in the clerks hands. With digital currency, nevertheless, 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 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 every one 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 awarded bitcoin whenever they add a new block of transactions to the blockchain.
In 2009, it had been 50. In 2013, it had been 25, at the time of writing it is 12.5, and sometime in the center of 2020 Look At This it will halve to 6.25. .
At this rate 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 expensive for miners to produce.
Here's the catch. In order to get bitcoin miners to actually earn bitcoin from verifying transactions, two things must occur. To begin with, they need to verify 1 megabyte (MB) worth of transactions, which can theoretically be as little as 1 transaction but are more often a few thousand, depending on how much information each transaction stores.