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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 off.

Far less glamorous but equally uncertain, bitcoin mining is performed by high-definition computers that solve complex computational science issues (read: so complicated that they cannot be solved by hand). The luck and work demanded 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 solve these complex math issues on the bitcoin network, they 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 dependable and secure, 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 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. 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 copyright 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, by way of example, that transaction is processed by means of a payment processing company such as Mastercard or Visa. In addition to recording your transaction history, those companies affirm that transactions are not fraudulent, which is one reason your debit or credit card could be suspended while traveling. .

Bitcoin, on the have a peek at this website other hand, is not controlled by a central authority. Instead, bitcoin is backed by millions of computers throughout the world known as miners. This network of computers performs the same function as the Federal Reserve, Visa, and Mastercard, but with a few key 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 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 record called the blockchain. .

When bitcoin miners put in a new block of transactions to the blockchain, a part of their job is to ensure that those transactions are accurate. (More on the wonder of the way this happens in a second) In specific, bitcoin miners make certain that bitcoin are not being reproduced, a unique quirk of digital currencies known as double-spending.

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Once you spend $20 at the store, that invoice is in the clerks handson. With digital currency, nevertheless, it's a different story. .

Digital information can be reproduced relatively easily, so with bitcoin and other digital currencies, there's a their explanation threat that a spender can create backup of their bitcoin and send it to another party while still holding onto the original. Let's return to printed currency for a moment and say someone attempted to replicate their 20 bill in order to spend both the original and the copyright at a grocery store.

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If the numbers were identical, the clerk could 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 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 add a new block of transactions to the blockchain.

In 2009, it had been 50. In 2013, it had been 25, in the time of writing it's 12.5, and sometime in the center 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 is the catch. In order for bitcoin miners to really earn bitcoin from verifying transactions, two things must happen. To begin with, they must verify 1 megabyte (MB) worth of transactions, which can technically be as little as 1 transaction but are far more often a few thousand, depending on how much data each transaction stores.