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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-powered computers which solve complex computational math problems (read: so complex 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. 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 issues, bitcoin miners make the bitcoin payment network trustworthy 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 functions in detail, lets begin with a procedure 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 with a central bank called 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 electronic payments using the U.S. dollar are backed by a central authority. When you make an online order using your debit card or credit 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 affirm that transactions are not fraudulent, and that's one reason your credit or debit card could 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 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 a transaction. Transactions generated in-store and online are documented by banks, point-of-sale systems, and bodily receipts. Bitcoin miners achieve the exact same effect without these institutions by clumping transactions together in cubes and adding them to a public document known as the blockchain. .
When bitcoin miners add a new block of transactions to the blockchain, a part of the job is to make sure that those transactions are true. (More on the magic 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 in the shop, that bill is in the clerks hands. With electronic currency, nevertheless, it's a different story. .
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When 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 those 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 is 12.5, and sometime in the center of 2020 it more helpful hints 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 costly for miners to produce.
Here's the catch. In order for bitcoin miners to really earn bitcoin from verifying transactions, two things must happen. To begin with, they need to confirm 1 megabyte (MB) value of transactions, which can theoretically be as small as 1 transaction but are more often several thousand, depending on how much data each transaction stores.