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Chances are you listen to the term 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 that solve complex computational math problems (read: so complex that they cannot be solved by hand). The luck 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 result of bitcoin mining is twofold. First, when computers resolve these complex math 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 make the bitcoin payment network trustworthy 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 works in greater 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 by a central bank called the Federal Reserve. In addition to a bunch 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. buck are backed by a central authority. When you make an online purchase using your debit card or charge card, for instance, that transaction is processed by a payment processing company like Mastercard or Visa. In addition to recording your transaction history, those companies verify that transactions are not fraudulent, and that's one reason that your debit or credit card may be suspended while traveling. .
Bitcoin, on the other hand, is not controlled by a central authority. Instead, bitcoin is backed by millions of servers across the world known as miners. This network of computers performs the same 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 visit site assess their accuracy.
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When someone makes a purchase or purchase using bitcoin, we predict a transaction. Transactions made in-store and online are documented by banks, point-of-sale systems, and bodily receipts. Bitcoin miners achieve the same effect without these institutions by clumping transactions together in cubes and adding them into a public record called the blockchain. .
When bitcoin miners add a new block of transactions to the blockchain, a part of the job is to make sure that these transactions are accurate. (More on the wonder of the way this happens in a second) In particular, bitcoin miners make sure bitcoin are not being reproduced, a unique quirk of digital currencies called double-spending.
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Once you spend $20 in the shop, that bill is in the clerks handson. With electronic currency, nevertheless, it's a different story. .
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If the numbers were identical, the clerk would know the money had been replicated. 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, nevertheless, verifying each of those transactions can be a great deal 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 check my blog 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 precious over time but also more expensive for miners to make.
Here is the catch. In order to get bitcoin miners to actually earn bitcoin from verifying transactions, two things have to happen. First, they need to confirm 1 megabyte (MB) worth of transactions, which can technically be as little as 1 transaction but are more often a few thousand, depending on how much information each transaction stores.