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Chances are you hear the term bitcoin mining and your mind begins to wander to the Western fantasy of pickaxes, soil, 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-powered computers that solve complex computational science issues (read: so complicated they cannot be solved by hand). The fortune 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. To begin with, when computers solve these complex math problems on the bitcoin networkthey create new bitcoin, not unlike when a mining operation extracts gold in the ground. And second, by solving computational mathematics problems, 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 works in greater detail, lets begin with a process thats a tiny 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 regulates the production of new money and prosecutes the usage 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 or charge 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, these companies affirm that transactions are not fraudulent, and that's one reason your debit or credit card could be suspended while traveling. .
Bitcoin, on the other hand, is not controlled by a central authority. Instead, bitcoin is backed by millions of computers across 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 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 sale using bitcoin, we predict a transaction. Transactions generated in-store and online are documented by banks, point-of-sale systems, and bodily receipts. Bitcoin miners achieve the same effect with no institutions by clumping transactions together in blocks and adding them to a public record known as the blockchain. .
When bitcoin miners put in a new block from this source of transactions to the blockchain, a part of the job is to ensure that these transactions are true. (More on the wonder of the way this happens in a second.) In specific, bitcoin miners make sure that bitcoin are not being duplicated, a unique quirk of digital currencies called double-spending.
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Once you spend $20 at the store, that bill 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 confirm new transactions. .
With as many as 600,000 purchases and sales occurring in a single day, however, 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 had been 50. In 2013, it was 25, in the time of writing it's 12.5, and sometime in the middle 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 precious 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 need to verify 1 megabyte (MB) value of transactions, which can theoretically be as little as 1 transaction but are far more often several thousand, depending on how much information each transaction stores.