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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 away.
Far less glamorous but equally uncertain, bitcoin mining is done by high-powered computers that solve complex computational math problems (read: so complicated they cannot be solved by hand). The fortune and work required 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 result of bitcoin mining is twofold. To begin with, when computers solve these intricate 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 create the bitcoin payment network dependable 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 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 trust printed currencies, at least in the United States. Thats because the U.S. dollar is backed with 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 electronic payments using the U.S. dollar are backed by a central authority. When you make an online order using your debit or credit card, by way of example, 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 credit or debit card could be suspended while traveling. .
Bitcoin, on the other hand, is not regulated 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 check 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 that a transaction. Transactions made in-store and online are documented by banks, point-of-sale systems, and bodily receipts. Bitcoin miners achieve the exact same effect with no institutions by clumping transactions together in blocks and adding them into a public record called the blockchain. .
When bitcoin miners add a new block of transactions to the blockchain, part of their job is to make sure that these transactions are true. (More on the wonder of the way this happens in a second) In particular, bitcoin miners be sure that bitcoin are not being reproduced, a unique quirk of electronic currencies known as double-spending.
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Once you spend $20 at the shop, that bill is in the clerks hands. With digital currency, nevertheless, it is a different story. .
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When 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 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 awarded bitcoin whenever they include a new block of transactions to the blockchain.
In 2009, it was 50. In 2013, it was 25, at the time of writing it is 12.5, and sometime in the center of 2020 it will halve to 6.25. .
At this rate of halving, the total 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's the catch. In order for bitcoin miners to actually earn bitcoin from verifying transactions, two things must happen. First, they need to verify 1 megabyte (MB) value of transactions, which can technically be as small as 1 transaction but are far more often several thousand, depending on how much data each transaction stores.