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Chances are you listen to 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 that 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 end result of bitcoin mining is twofold. To begin with, when computers resolve these intricate mathematics issues on the bitcoin networkthey produce new bitcoin, not unlike when a mining operation extracts gold from the ground. And second, by solving computational mathematics problems, bitcoin miners make the bitcoin payment network trustworthy 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 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 called the Federal Reserve. In addition to a host of additional responsibilities, the Federal Reserve regulates the production of new money and prosecutes the use of counterfeit currency. .
Even digital 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 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 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 servers throughout the world known as miners. This network of computers plays the identical function as the Federal Reserve, Visa, and Mastercard, but with a few important differences. Like the Federal Reserve, Visa, and Mastercard, bitcoin miners record transactions and check their accuracy.
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When great post to read 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 systems, and physical receipts. Bitcoin miners achieve the same effect with no institutions by clumping transactions together in cubes and adding them to a public document known as the blockchain. .
When bitcoin miners put in a new block of transactions to the blockchain, a part of their job is to ensure more info here that those transactions are true. (More on the magic of the way this happens in a second) In particular, bitcoin miners be certain bitcoin are not being reproduced, a unique quirk of digital currencies known as double-spending.
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Once you spend $20 in the store, that bill is in the clerks handson. With digital currency, nevertheless, it is directory 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 confirm new transactions. .
With as many as 600,000 purchases and sales occurring in a single day, nevertheless, verifying each 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 given bitcoin whenever they add 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 is 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 for bitcoin miners to really earn bitcoin from verifying transactions, two things have to occur. First, they must verify 1 megabyte (MB) worth of transactions, which can theoretically be as small as 1 transaction but are more often a few thousand, depending on how much data each transaction shops.