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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, 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-definition computers that solve complex computational math problems (read: so complicated that 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. First, when computers resolve these complex mathematics issues on the bitcoin network, they 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 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 a tiny 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. Feeling 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 regulates the production of new money and prosecutes the use of counterfeit currency. .
Even electronic payments using the U.S. buck are backed with a central authority. When you make an online purchase using your debit or charge card, for instance, that transaction is processed by means of a payment processing company such as Mastercard or Visa. In addition to recording your transaction history, these companies affirm that transactions are not fraudulent, and that's one reason that your credit or debit card could be suspended while traveling. .
Bitcoin, on the other hand, is not regulated by a central authority. Instead, bitcoin is backed by millions of servers across the world called miners. This network of computers plays the same function as the Federal Reserve, Visa, and Mastercard, but using a few important differences. Like the Federal Reserve, Visa, more information 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 generated in-store and online are documented by banks, point-of-sale systems, and bodily receipts. Bitcoin miners achieve the same effect with no institutions by clumping transactions together in cubes and adding them into a public document called the blockchain. .
When bitcoin miners add a new block of transactions to the blockchain, part of their job is to ensure that those transactions are true. (More on the magic of the way this happens in a second.) In particular, bitcoin miners make certain bitcoin are not being duplicated, a unique quirk of digital currencies called double-spending.
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Once you spend $20 at the shop, that bill is in the clerks hands. With digital currency, however, it's a different story. .
Digital information can be replicated relatively easily, so with bitcoin and other electronic currencies, there's a threat that a spender can make copy of their bitcoin and send it to another party while still holding onto the original. Let's return to printed currency for visit the site a moment and say someone tried to duplicate their $20 bill in order to spend both the original and the counterfeit in a supermarket shop.
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When the numbers were identical, then the clerk could know the money had been replicated. 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 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 include 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 is 12.5, and sometime in the center of 2020 it will halve view it now to 6.25. .
At this speed 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 really earn bitcoin from verifying transactions, two things must happen. First, they must confirm 1 megabyte (MB) value of transactions, which can theoretically be as small as 1 transaction but are more often a few thousand, depending on how much data each transaction shops.