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Chances are you hear the phrase 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-powered computers that solve complex computational math problems (read: so complex they cannot be solved by hand). The fortune and work demanded 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 resolve these intricate math issues on the bitcoin networkthey create new bitcoin, not unlike when a mining operation extracts gold from 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 works in detail, lets begin with a process thats just a little 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 with a central bank known as the Federal Reserve. In addition to a host of additional responsibilities, the Federal Reserve modulates the production of new money and prosecutes the usage of counterfeit currency. .
Even digital payments using the U.S. dollar are backed with a central authority. When you make an online purchase 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 affirm that transactions are not fraudulent, which is one reason that your debit or credit card may 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 plays the same function as the Federal Reserve, Visa, and Mastercard, but with a few key 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 that a transaction. Transactions generated in-store and online are documented by banks, point-of-sale methods, and physical receipts. Bitcoin miners achieve the exact same effect with no institutions by clumping transactions together in blocks and adding them to a public document called the blockchain. .
When bitcoin miners put in a new block of transactions to the blockchain, part of the job is to make sure that those transactions are true. (More on the wonder of how this happens in a second) In specific, bitcoin miners make certain bitcoin are not being reproduced, a unique quirk of electronic currencies known as double-spending.
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Once you spend $20 in the shop, that bill is in the clerks hands. With digital currency, however, it is 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 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 these 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 given bitcoin whenever they add 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 middle of 2020 my blog 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 to get bitcoin miners to really earn bitcoin from verifying transactions, two things must happen. First, they must verify 1 megabyte (MB) worth of transactions, which can theoretically be as little as 1 transaction but are more often several thousand, depending on how much data each transaction stores.