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Chances are you hear the term 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 off.
Far less glamorous but equally uncertain, bitcoin mining is done by high-definition computers that solve complex computational math problems (read: so complex 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 result of bitcoin mining is twofold. First, when computers resolve these complex mathematics issues 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 dependable and protected, by verifying its transaction information. .
Theres a good chance all that only made so much sense. In order to explain how bitcoin mining functions in detail, lets begin with a process thats 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 by a central bank called the Federal Reserve. In addition to a host of other responsibilities, the Federal Reserve modulates the production of new money and prosecutes the usage of counterfeit currency. .
Even electronic payments using the U.S. buck are backed with a central authority. When you make an online order using your debit card or charge 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 affirm 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 controlled by a central authority. Instead, bitcoin is endorsed by millions of servers across the world known as miners. This network of computers plays 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 call that a transaction. Transactions made in-store and online are documented by banks, point-of-sale methods, and bodily receipts. Bitcoin miners achieve the exact same effect with no institutions by clumping transactions together in cubes and adding them into a public record known as the blockchain. .
When bitcoin miners add a new block of transactions to the blockchain, a part of their job is to make sure that those transactions are accurate. (More on the magic of the way this happens in a second.) In specific, bitcoin miners make certain bitcoin are not being reproduced, a unique quirk of digital currencies called double-spending.
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Once you spend $20 in the shop, that bill is in the clerks hands. With electronic currency, however, it's a different story. .
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When the numbers were identical, the clerk could know the money had been replicated. 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 description one of these transactions can be a lot 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 include a new block of transactions to the blockchain.
In 2009, it was 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 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 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 need to confirm 1 megabyte (MB) value of transactions, which can theoretically be as little as 1 transaction but are more often a few thousand, depending on how much information each transaction stores.