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Chances are you listen to 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 off.
Far less glamorous but equally uncertain, bitcoin mining is performed by high-powered computers which solve complex computational science issues (read: so complex they cannot be solved by hand). The fortune and work demanded 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 intricate mathematics problems on the bitcoin network, they produce new bitcoin, not unlike when a mining operation extracts gold in the ground. And second, by solving computational math problems, bitcoin miners create the bitcoin payment network trustworthy 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 process thats just 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. Feeling 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 regulates the production of new money and prosecutes the use of counterfeit currency. .
Even electronic payments using the U.S. buck are backed by a central authority. When you make an online order using your debit card or charge card, for instance, 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 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 computers throughout the world called miners. This network of computers plays the same function as the Federal Reserve, Visa, and Mastercard, but with a couple of 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 sale using bitcoin, we call my site a transaction. Transactions made in-store and online are documented by banks, point-of-sale methods, and bodily receipts. Bitcoin miners achieve the same effect without these institutions by clumping transactions together in blocks and adding them into a public document known as the blockchain. .
When bitcoin miners put in a new block of transactions to the blockchain, part of their job is to ensure that these transactions are accurate. (More on the magic of how this happens in a second.) In specific, bitcoin miners make sure that bitcoin are not being duplicated, 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's a different story. .
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When the numbers were identical, then the clerk great post to read could 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, however, verifying every one of those transactions can be a lot 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 add a new block of transactions to the blockchain.
In 2009, it had been 50. In 2013, it was 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 precious over time but also more expensive for miners to produce.
Here is the catch. In order for bitcoin miners to actually earn bitcoin from verifying transactions, two things must occur. To begin with, they need to confirm 1 megabyte (MB) value of transactions, which can technically be as small as 1 transaction but are more often several thousand, depending on how much data each transaction shops.