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The Fundamentals of Bitcoin Mining

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Inflation and deflation has created a system where governments control the flow of money in order to keep the economy stable. When too much of a particular money or currency floods the marketplace, it becomes less valuable, which increases the cost of goods and services. This is inflation. On the other hand, deflation occurs when there is a limited amount of acceptable currency, so competitors have to drop their prices to fight for those limited funds.

In each case, a centralized authority controls how much money is available to the users of a particular system. It used to be this type of traditional currency was backed by gold or some other precious metal, which was kept in a secure reserve. That is not usually the case anymore. In the United States, the US dollar was backed by gold. There was a certain amount of gold kept in reserve, to support the issuance of dollars.

While some gold is still kept in Fort Knox and other reserves to "support" and secure the dollar currency, the US and other countries predominantly issue what is called fiat currency. That means your government tells you what is going to be used as "money" to secure transactions. This is called fiat currency because it is not backed by a physical commodity, and instead is driven by supply, demand and the whims of the centralized authority which regulates it.

What Does Fiat Currency Have To Do With Bitcoin Mining?

There is no centralized, regulatory group of humans which verifies, authorizes or manipulates Bitcoin value. This peer-to-peer verification system by everyone in the Bitcoin marketplace makes for an extremely safe transactional platform. This means an individual or group cannot arbitrarily affect the value of Bitcoins.

Anyone with a powerful enough computer and reliable internet access can "mine" Bitcoins. Every time Bitcoin is exchanged between two parties, the transaction must be verified. Every user participating in the Bitcoin world constantly receives an updated blockchain, which identifies every transaction which has ever been verified in that system. If you find an online merchant which excepts Bitcoins, and you attempt to purchase something with that cryptocurrency, the transaction needs to be verified.

As soon as you make the transaction request, Bitcoin miners go to work. Their computers are trying to verify if this is a real and true transaction. In other words, they are checking the updated public ledger, known as the blockchain, to see if this new transaction agrees with the balances already verified. A logarithmic puzzle must be solved to prove that this transaction should be added to the already existing blockchain.

When that puzzle is solved, and the transaction has been correctly verified, the miner whose computer solved the problem first gets a block reward, which is a portion of a new Bitcoin. This is how new Bitcoins are mined and created.