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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 off.
Far less glamorous but equally uncertain, bitcoin mining is performed by high-definition computers that solve complex computational science issues (read: so complicated they cannot be solved by hand). The luck and work demanded 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. To begin with, when computers solve these complex math problems on the bitcoin networkthey create new bitcoin, not unlike when a mining operation extracts gold from the ground. And second, by solving computational mathematics issues, bitcoin miners make the bitcoin payment network dependable and secure, 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 just 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. Feeling because the U.S. dollar is backed with a central bank known as 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 digital payments using the U.S. buck are backed with a central authority. When you make an online purchase using your debit card or credit card, for example, 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, which is one reason your debit or credit card may be suspended while traveling. .
Bitcoin, on the other hand, is not regulated by a central authority. Instead, bitcoin is backed by millions of computers throughout the world known as miners. How To Buy Bitcoin In Canada This network of computers plays the same function as the Federal Reserve, Visa, and Mastercard, but with a couple of key 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 predict a transaction. Transactions made in-store and online are documented by banks, point-of-sale systems, and bodily receipts. Bitcoin miners achieve the same effect without these this hyperlink institutions by clumping transactions together in blocks and adding them into a public record 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 accurate. (More on the magic of the way this happens in a second) In specific, bitcoin miners be sure that bitcoin are not being duplicated, a unique quirk of electronic currencies called double-spending.
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Once you spend $20 at the shop, that invoice is in the clerks handson. With electronic currency, nevertheless, it's a different story. .
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When the numbers were identical, then the clerk would 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 those 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 awarded 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's 12.5, and sometime in the center of 2020 it will halve to 6.25. .
At this rate 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 expensive for miners to produce.
Here's the catch. In order to get bitcoin miners to really earn bitcoin from verifying transactions, two things have to occur. To begin with, they need to verify 1 megabyte (MB) worth of transactions, which can technically be as little as 1 transaction but are more often a few thousand, depending on how much information each transaction stores.