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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-powered computers which solve complex computational math problems (read: so complicated 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. First, when computers resolve these complex math issues on the bitcoin network, they create 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 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 greater detail, lets begin with a process 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. Thats because the U.S. dollar is backed by a central bank known as the Federal Reserve. In addition to a bunch of additional responsibilities, the Federal Reserve regulates the production of new money and prosecutes the use of counterfeit currency. .
Even digital payments using the U.S. buck 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 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, which is one reason that your debit or credit 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 performs 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 assess their accuracy.
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When someone makes a purchase or sale using bitcoin, we predict that Visit Website 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 without these institutions by clumping transactions together in blocks 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 ensure that these transactions are accurate. (More on the magic of how this happens in a second) In particular, bitcoin miners make 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 shop, that invoice is in the clerks handson. With electronic currency, nevertheless, it is a different story. .
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If the numbers were identical, then the clerk would know the money had been duplicated. This analogy is very similar to what a bitcoin miner does when they verify new transactions. .
With as many as 600,000 purchases and my blog sales occurring in a single day, nevertheless, verifying every one of those transactions can be a great deal 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 was 25, at the time of writing it is 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 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 (MB) value of transactions, which can technically be as small as 1 transaction but are more often several thousand, depending on how much information each transaction shops.