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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-powered computers that solve complex computational math problems (read: so complicated that they cannot be solved by hand). The luck and work demanded by a computer to solve one of those problems is the equivalent of a miner striking gold in the ground while digging in a sandbox.

The end result of bitcoin mining is twofold. First, when computers resolve these complex math issues on the bitcoin networkthey create 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 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 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 bunch of additional 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 by a central authority. When you make an online purchase using your debit or charge 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 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 backed by millions of computers throughout the world known as 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 resource purchase or sale using bitcoin, we predict a transaction. Transactions generated in-store and online are documented by banks, the original source point-of-sale systems, and physical receipts. Bitcoin miners achieve the same effect with no institutions by clumping transactions together in cubes and adding them to a public document called the blockchain. .

When bitcoin miners add a new block of transactions to the blockchain, a part of their job is to make sure 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 called double-spending.

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

Digital information can be reproduced relatively easily, so with bitcoin and other digital currencies, there's a risk that a spender can make copy of the bitcoin and send it to another party whilst still holding onto the original. Let's 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 in a supermarket store.

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When the Full Article numbers were identical, the clerk would know the money had been duplicated. This analogy is very 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 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 given bitcoin whenever they add a new block of transactions to the blockchain.

In 2009, it had been 50. In 2013, it had been 25, at 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 costly 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 happen. To begin with, they must verify 1 megabyte (MB) value of transactions, which can theoretically be as little as 1 transaction but are more often several thousand, depending on how much data each transaction shops.