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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 performed by high-definition computers that solve complex computational science issues (read: so complex that they cannot be solved by hand). The luck 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 end result of bitcoin mining is twofold. First, when computers resolve these complex mathematics 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 trustworthy and protected, 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 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. Feeling because the U.S. dollar is backed with a central bank called the Federal Reserve. In addition to a host of other responsibilities, the Federal Reserve regulates the production of new money and prosecutes the usage of counterfeit currency. .
Even electronic payments using the U.S. buck are backed by a central authority. When you make an online purchase using your debit card or credit card, by way of instance, that transaction is processed by a payment processing company such as 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 hand, is not regulated by a central authority. Instead, bitcoin is backed by millions of computers throughout the world known as miners. This network of computers performs 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 her latest blog assess their accuracy.
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When someone makes a purchase or sale using bitcoin, we call that a transaction. Transactions generated in-store and online are documented by banks, point-of-sale methods, and physical receipts. Bitcoin miners achieve the same effect with no institutions by clumping transactions together in blocks and adding them to a public document called the blockchain. .
When bitcoin miners add a new block of transactions to the blockchain, part of their job is to make sure that those transactions are true. (More on the magic of the way this happens in a second) In particular, bitcoin miners make sure bitcoin are not being reproduced, a unique quirk of electronic currencies known as double-spending.
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Once you spend $20 at the store, that invoice is in the clerks hands. With electronic currency, nevertheless, it is a different story. .
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When the numbers were identical, check here the clerk could know the money had been replicated. This analogy useful site 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 lot 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 given bitcoin whenever they add a new block of transactions to the blockchain.
In 2009, it was 50. In 2013, it was 25, at the time of writing it's 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 valuable over time but also more costly for miners to make.
Here's the catch. In order to get bitcoin miners to really earn bitcoin from verifying transactions, two things have to happen. First, they must verify 1 megabyte (MB) value of transactions, which can theoretically be as small as 1 transaction but are far more often a few thousand, depending on how much data each transaction shops.