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Chances are you hear 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 away.
Far less glamorous but equally uncertain, bitcoin mining is done by high-powered computers which solve complex computational math problems (read: so complicated they cannot be solved by hand). The luck and work required by a computer to solve one of those 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. To begin with, when computers solve these intricate mathematics problems on the bitcoin network, they create new bitcoin, not unlike when a mining operation extracts gold in the ground. And second, by solving computational mathematics issues, bitcoin miners make the bitcoin payment network trustworthy and secure, by verifying its transaction information. .
Theres a fantastic chance all that only made so much sense. In order to explain how bitcoin mining works 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 known as the Federal Reserve. In addition to a bunch of additional 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 by a central authority. When you make an online order using your debit or charge 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 your debit or credit card could 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 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 purchase using bitcoin, we call 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 without these institutions by clumping transactions together in cubes and adding them to a public document called the blockchain. .
When bitcoin miners put in a new block of transactions to the blockchain, a part of the job is to ensure that these transactions are true. (More on the wonder of how this happens in a second) In particular, bitcoin miners be certain that 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 digital currency, however, it's a different story. .
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If the numbers were identical, then the clerk would know the money had been duplicated. 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 one 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, at 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 Homepage 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 expensive for miners to produce.
Here's the catch. In order for bitcoin miners to actually earn bitcoin from verifying transactions, two things must occur. First, they need to verify 1 megabyte (MB) worth of transactions, which can technically be as little as 1 transaction but are far more often a few thousand, depending on how much information each transaction shops.