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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-definition computers which solve complex computational science issues (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 end result of bitcoin mining is twofold. To begin with, when computers solve these complex math issues on the bitcoin network, they create new bitcoin, not unlike when a mining operation extracts gold in the ground. And second, by solving computational math issues, bitcoin miners create the bitcoin payment network trustworthy and protected, by verifying its transaction information. .
Theres a good chance all of that only made so much sense. In order to explain how bitcoin mining functions 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 anticipate 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 modulates 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 purchase using your debit or credit card, by way of instance, that transaction is processed by means of 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 your credit or debit card may be suspended while traveling. .
Bitcoin, on the other hand, is not regulated by a central authority. Instead, bitcoin is endorsed by millions of computers across the world called miners. This network of computers plays the same function as the Federal Reserve, Visa, and Mastercard, but using a few important 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 call a transaction. Transactions generated in-store and online are documented by banks, point-of-sale methods, and physical 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 put in 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 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 Homepage shop, that bill is in the clerks hands. With digital currency, nevertheless, it is a different story. .
Digital information can be reproduced relatively easily, so with bitcoin and other electronic currencies, there is a threat that a spender can create copy of the bitcoin and send it to another party while holding onto the original. Let us return to printed currency for a moment and say someone tried to duplicate their $20 bill in order to spend the original and the counterfeit in a supermarket store.
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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 verify new transactions. .
With as many as 600,000 purchases and sales occurring in a single day, however, verifying every one 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 awarded bitcoin whenever they include a new block of transactions to the blockchain.
In 2009, it was 50. In 2013, it had been 25, at 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 expensive for miners to produce.
Here is the catch. In order for 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 small as 1 transaction but are far more often several thousand, depending on how much information each transaction stores.