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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-powered computers that solve complex computational math problems (read: so complex they cannot be solved by hand). The luck and work required 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 mathematics 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 problems, bitcoin miners create 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 works 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 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 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 means of a payment processing company like Mastercard or Visa. In addition to recording your transaction history, these companies affirm that transactions are not fraudulent, which is one reason your credit or debit card could be suspended while traveling. .

Bitcoin, on the other hand, is not controlled by a central authority. Instead, bitcoin is backed by millions of servers throughout the world called miners. This network of computers plays the identical function as the Federal Reserve, Visa, and Mastercard, but using 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 sale using bitcoin, you could try these out we predict 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 blocks and adding them to a public document called the blockchain. .

When bitcoin miners put in a new block of transactions to the blockchain, a part of their job is to ensure that those transactions are accurate. (More on the magic of how this happens in a second.) In specific, bitcoin miners be sure that bitcoin are not being reproduced, a unique quirk of electronic currencies known as double-spending.

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Once you spend $20 at the shop, that bill is in the clerks handson. With digital currency, however, it is a different story. .

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Digital information can be replicated relatively easily, so with bitcoin and other electronic currencies, there is a risk that a spender can create backup of the bitcoin and send it to another party while holding onto the original. Let's return to printed currency for a moment and say someone tried to duplicate 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, 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 day, nevertheless, verifying every one 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 awarded bitcoin whenever they add a new block of transactions to the blockchain.

In 2009, it was 50. In 2013, it was 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 total number of bitcoin in circulation will approach a limit of 21 million, making the currency more scarce and valuable over time but also more costly for miners to make.

Here is the catch. In order for bitcoin miners to really earn bitcoin from verifying transactions, two things must happen. First, they need to confirm 1 megabyte (MB) value of transactions, which can theoretically be as little as 1 transaction but are far more often a few thousand, depending on how much data each transaction stores.

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