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Chances are you hear 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 away.

Far less glamorous but equally uncertain, bitcoin mining is performed by high-powered computers that solve complex computational science issues (read: so complicated they cannot be solved by hand). The fortune and work required 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 complex mathematics problems on the bitcoin networkthey 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 works in greater detail, lets begin with a procedure thats a little 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 digital payments using the U.S. dollar are backed with a central authority. When you make an online purchase using your debit or charge card, for example, that transaction is processed by 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 debit or credit card may be suspended while traveling. .

Bitcoin, on the other hand, is not controlled by a central authority. Instead, bitcoin is browse this site backed by millions of computers across the world called miners. This network of computers performs the same function as the Federal Reserve, Visa, and Mastercard, but with a couple of key differences. pop over to this site 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 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 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, a part of the job is to ensure that these transactions are accurate. (More on the magic of the way this happens in a second) In specific, bitcoin miners be certain bitcoin are not being duplicated, a unique quirk of digital currencies called double-spending.

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Once you spend $20 in the store, that bill is in the clerks hands. With digital currency, nevertheless, it is a different story. .

Digital information can be reproduced relatively easily, so with bitcoin and other electronic currencies, there's a risk that a spender can make backup of the bitcoin and send it to another party whilst holding onto the original. Let us return to printed currency for a moment and say someone attempted to duplicate their $20 bill in order to spend both the original and the counterfeit at a grocery store.

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If the numbers were identical, the clerk could 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 each of these transactions can be a great deal 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 had been 25, in 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 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 make.

Here is the catch. In order for bitcoin miners to really earn bitcoin from verifying transactions, two things have to occur. To begin with, they need to confirm 1 megabyte (MB) worth of transactions, which can theoretically be as small as 1 transaction but are more often a few thousand, depending on how much information each transaction shops.