I’m writing from the old mining town of Virginia City which is near to Lake Tahoe. So why not discuss the modern version of mining… the blockchain.
Bitcoin is backed by millions of computers around the world called “nodes.” Today, the Federal Reserve, VISA and MasterCard back the current currency system but only THEY have access to the data. THEY also control the system. Bitcoin is open source to everyone and NO ONE controls it. Bitcoin mining is highly uncertain like mining for gold. Miners solve complex math problems to verify transactions in a block performed by high-powered computers.
Blockchain seems to be that hot topic that everyone talks about but no one seems to understand.
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. So the miners insure both privacy and security. For example, the miners make sure that bitcoin transactions are not being duplicated (aka “double spending”). So if you have $100 in your crypto wallet, the miners verify that you didn’t spend the $100 on a music festival ticket for $100 AND on buying a $100 skateboard online. If the miner solves the complex math problem, then a new block is added to the blockchain and the miner is rewarded a block reward in bitcoin. This is the only way that new bitcoins get issued.
The block reward is halved every 210,000 blocks, or roughly every 4 years. In 2009, it was 50. In 2013, it was 25, in 2018 it was 12.5, and sometime in the middle of 2020 it will halve to 6.25. At this rate of halving, the total number of bitcoins 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 produce.
(1) A party requests a transaction.
(2) The transaction is broadcast to all on the entire network.
(3) The transaction is validated using validation rules set up by the blockchain network.
(4) Validated transactions are kept in a block and sealed with a hash algorithm.
(5) The block approaches the blockchain for authentication and specifically the hash is authenticated.
(6) This process is very secure because if a hacker tries to change the hash algorithm, the block will be rejected by the blockchain. Only after every computer on the blockchain network validates the block via a hash authentication, then the block becomes a part of the blockchain.