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Chances are you hear 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 done by high-powered computers that solve complex computational science issues (read: so complex they cannot be solved by hand). The fortune and work required by a computer to solve one of these 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 math issues on the bitcoin networkthey create new bitcoin, not unlike when a mining operation extracts gold in the ground. And second, by solving computational mathematics issues, bitcoin miners create the bitcoin payment network trustworthy and protected, by verifying its transaction information. .

Theres a fantastic chance all of that only made so much sense. In order to explain how bitcoin mining functions in 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 anticipate printed currencies, at least in the United States. Thats because the U.S. dollar is backed with a central bank called the Federal Reserve. In addition to a bunch of other responsibilities, the Federal Reserve regulates the production of new money and prosecutes the usage 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 card or credit card, for instance, that transaction is processed by a payment processing company such as Mastercard or Visa. In addition to recording your transaction history, those companies verify that transactions are not fraudulent, and that's one reason your credit or debit card may be suspended while traveling. .

Bitcoin, on the other hand, is not regulated by have a peek at these guys a central authority. Instead, bitcoin is endorsed by millions of computers across the world known as miners. This network of computers performs the same function as the Federal Reserve, Visa, and Mastercard, but using a few 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 try these out or purchase using bitcoin, we call that 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 without these institutions by clumping transactions together in blocks and adding them into a public record 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 accurate. (More on the wonder of the way this happens in a second) In particular, bitcoin miners make certain bitcoin are not being reproduced, a unique quirk of digital currencies called double-spending.

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Once you spend $20 in the store, that invoice is in the clerks hands. With electronic currency, however, it's a different story. .

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Digital information can be replicated relatively easily, so with bitcoin and other digital currencies, there's a threat that a spender can create copy of the bitcoin and send it to another party while still holding onto the original. Let's return to printed currency for a moment and say someone tried to replicate 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 would know the money had been duplicated. 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 you could check here day, however, verifying each of those 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 awarded bitcoin whenever they add a new block of transactions to the blockchain.

In 2009, it had been 50. In 2013, it was 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 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 make.

Here's the catch. In order to get bitcoin miners to really earn bitcoin from verifying transactions, two things must happen. To begin with, they must confirm 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 data each transaction shops.

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