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Chances are you listen to the term 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 done by high-definition computers which solve complex computational math problems (read: so complex that they cannot be solved by hand). The luck 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 problems 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 issues, 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 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 called the Federal Reserve. In addition to a bunch of additional responsibilities, the Federal Reserve modulates the production of new money and prosecutes the use of counterfeit currency. .

Even electronic payments using the U.S. buck are backed by a central authority. When you make an online purchase using your debit or charge card, for instance, that transaction is processed by a payment processing company like Mastercard or Visa. In addition to recording your transaction history, these companies verify that transactions are not fraudulent, and that's one reason that 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 why not try here backed by millions of computers across the world called miners. This network of computers performs the identical 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 generated in-store and online are documented by banks, point-of-sale systems, and physical receipts. Bitcoin miners achieve the exact same effect without these institutions by clumping transactions together in cubes and adding them into a public document called the blockchain. .

When bitcoin miners put in a new block of transactions to the blockchain, part of their job is to ensure that these transactions are accurate. (More on the wonder of the way this happens in a second.) In particular, bitcoin miners make certain that bitcoin are not being reproduced, a unique quirk of digital currencies known as double-spending.

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

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Digital information can be reproduced relatively easily, so with bitcoin and other electronic currencies, there is a risk that a spender can make copy of the bitcoin and send it to another party whilst holding onto the original. Let's 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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When the numbers were identical, then the clerk could know the money had been replicated. This analogy is very 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, however, verifying each of these transactions can be a lot of work for miners, which gets at one other crucial 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 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 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 make.

Here is the catch. In order to get bitcoin miners to actually earn bitcoin from verifying transactions, two things must occur. To begin with, they must confirm 1 megabyte (MB) value of transactions, which can technically be as small as 1 transaction but are far more often a few thousand, depending on how much data each transaction shops.

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