Bitcoin is often called ‘digital gold’ because of its limited supply and value defined by scarcity. New bitcoins are generated through ‘mining’.
Bitcoin mining serves the following purposes:
- Record keeping
- Production of new bitcoins
- Transaction verification
- Network protection
The people who participate in bitcoin mining are miners. They are members of a decentralized network formed by computers running the bitcoin-mining software. With this software, miners run a copy of the network on their PCs. This copy contains transaction records with a time stamp. All the records are piled into a chain of data units called blocks. The blockchain represents a form of storage of this data into a distributed public ledger. Bitcoin’s proof-of-work algorithm defines the time it takes to verify each transaction and crack a mathematical puzzle. It is governing the entire network instead of a centralized authority. For their efforts, miners receive rewards in the form of transaction fees charged from the sender and a portion of the newly generated bitcoins. The total 21M supply of bitcoin will be mined by 2140. The mining reward will be gradually decreasing by then.
The bitcoin network is transparent by design because the data stored on its blockchain is public. Miners protect the system through decentralized consensus which is achieved when the majority agrees upon the state of the network. Making changes in the data stored within the network will require immense computing power. These changes will become active only after the consensus and will be immediately displayed publicly. The system is designed that way to prevent hacker attacks.