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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 away.

Far less glamorous but equally uncertain, bitcoin mining is performed by high-powered computers which solve complex computational science issues (read: so complex 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 end result of bitcoin mining is twofold. To begin with, when computers solve these intricate mathematics issues on the bitcoin networkthey produce new bitcoin, not unlike when a mining operation extracts gold from the ground. And second, by solving computational math issues, bitcoin miners make the bitcoin payment network trustworthy and secure, 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 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 anticipate printed currencies, at least in the United States. Thats because the U.S. dollar is backed by a central bank known as the Federal Reserve. In addition to a host of additional 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 credit card, by way of example, that transaction is processed by a payment processing company such as Mastercard or Visa. In addition to recording your transaction history, those companies affirm that transactions are not fraudulent, which is one reason that 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 servers throughout the world known as miners. This network of computers plays 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 with no institutions by clumping transactions together in cubes and adding them to a public document known as the blockchain. .

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

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

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

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When the numbers were identical, then the clerk could know the money had been duplicated. This analogy is 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 every one of those transactions can be a great deal 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 Source 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 middle of 2020 it will halve to 6.25. .

At this speed 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 costly for miners to make.

Here is the catch. In order for bitcoin miners to actually earn bitcoin from verifying transactions, two things have to occur. To begin with, they need to confirm 1 megabyte (MB) value of transactions, which can theoretically be as little as 1 transaction but are far more often several thousand, depending on how much data each transaction stores.