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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 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 that the equivalent of a miner striking gold in the ground while digging in a sandbox.
The result of bitcoin mining is twofold. First, when computers solve these intricate mathematics problems on the bitcoin networkthey 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 dependable and protected, 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 greater 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 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 other 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 with a central authority. When you make an online purchase using your debit card or charge card, for instance, that transaction is processed by means of a payment processing company like Mastercard or Visa. In addition to recording your transaction history, these companies verify that transactions are not fraudulent, which is one reason that your credit or debit 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 servers throughout the world known as miners. This network of computers performs the identical 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 assess their accuracy.
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When someone makes a purchase or sale using bitcoin, we predict a transaction. Transactions made in-store and online are documented by banks, point-of-sale systems, and physical receipts. Bitcoin miners achieve the same effect with no institutions by like this clumping transactions together in cubes and adding them to a public record known as the blockchain. .
When bitcoin miners put in a new block of transactions to the blockchain, part of the job is to make sure that these transactions are true. (More on the magic of the way this happens in a second) In particular, bitcoin miners make certain 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 hands. With electronic currency, nevertheless, it is a different story. .
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When the numbers were identical, then the clerk would know the money had been replicated. This analogy is very similar to what a bitcoin miner does when they browse around this site confirm 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 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 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 speed of halving, the entire number of bitcoin in circulation will approach a limit of 21 million, making the currency more scarce and precious 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 must occur. To begin with, they must confirm 1 megabyte (MB) worth 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.