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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 which solve complex computational science issues (read: so complex they cannot be solved by hand). The luck and work demanded by a computer to solve one of those 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. 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 mathematics problems, bitcoin miners create the bitcoin payment network dependable and secure, 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 greater 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. Feeling because the U.S. dollar is backed with a central bank known as the Federal Reserve. In addition to a bunch 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. dollar are backed by a central authority. When you make an online order 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 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 throughout the world known as miners. This network of computers performs 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 assess their accuracy.
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When someone makes a purchase or purchase using bitcoin, we call that a transaction. Transactions made 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 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, part of their job is to make sure that these transactions are accurate. (More on the wonder of the way this happens in a second.) In specific, bitcoin miners make sure bitcoin are not being reproduced, a unique quirk of digital currencies known as double-spending.
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Once you spend $20 at the store, that bill is in the clerks hands. With digital currency, nevertheless, it is a different story. .
Digital information can be replicated relatively easily, so with bitcoin and other electronic currencies, there is a threat that a spender can make copy of the bitcoin and send it to another party while holding onto the original. Let us return to printed currency for a moment and say someone tried to replicate their $20 bill in order to spend the original and the counterfeit in a supermarket store.
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When the numbers were identical, the clerk 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, nevertheless, verifying each 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 add a new block of transactions to the blockchain.
In 2009, it was 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 rate of halving, the entire 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 to get bitcoin miners to actually earn bitcoin from verifying transactions, two things have to happen. First, they need to verify 1 view it now megabyte (MB) value of transactions, which can theoretically be as small as 1 transaction but are far more often a few thousand, depending on how much data each transaction stores.