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Chances are you hear 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 off.
Far less glamorous but equally uncertain, bitcoin mining is performed by high-definition computers which solve complex computational science issues (read: so complicated that they cannot be solved by hand). The fortune and work required 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 mathematics issues on the bitcoin networkthey produce 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 greater detail, lets begin with a procedure 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 by a central bank known as the Federal Reserve. In addition to a host of other responsibilities, the Federal Reserve modulates the production of new money and prosecutes the usage of counterfeit currency. .
Even digital payments using the U.S. buck are backed by a central authority. When you make an online purchase using your debit or credit card, for 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 verify 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 controlled by a central authority. Instead, bitcoin is endorsed by millions of computers throughout the world known as miners. This network of computers plays the identical function as the Federal Reserve, Visa, and Mastercard, but using a few 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 methods, and physical receipts. Bitcoin miners achieve the exact same effect without these site institutions by clumping transactions together in cubes and adding them into a public document called the blockchain. .
When bitcoin miners put in a new block of transactions to the blockchain, part of their job is to ensure that these transactions are true. (More on the magic of how this happens in a second) In specific, bitcoin miners make certain that bitcoin are not being reproduced, a unique quirk of electronic currencies called double-spending.
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Once you spend $20 at the shop, that invoice is in the clerks hands. With digital currency, however, it's a different story. .
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When the numbers were identical, then the clerk could know the money had been replicated. This analogy 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 awarded 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 center of 2020 it will halve to 6.25. .
At this speed 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 expensive for miners to produce.
Here's the catch. In order for bitcoin miners to actually earn bitcoin from verifying transactions, two things have to occur. First, a knockout post they must confirm 1 megabyte (MB) worth of transactions, use this link which can theoretically be as little as 1 transaction but are more often a few thousand, depending on how much data each transaction stores.