Bitcoin has no government or central bank introducing new currency into the economy. Unlike paper notes or coins, Bitcoin cannot be brought into existence physically, outside the network. Nor does the system have branches or agencies either at the sender’s or the recipient’s end to check if the Bitcoin is genuine and the transaction is indeed valid. Bitcoin miners accomplish these two very important tasks of releasing new bitcoins into the system and verifying ongoing transactions through a computing process called Bitcoin mining. Any computer can become a miner and the job involves using adequate computing power requiring specialized hardware and software to accomplish these tasks. [sociallocker]
Say, a guest at a restaurant pays for a meal with Bitcoin. The Bitcoin is sent from the sender’s wallet address to the restaurant’s wallet address over the network. Information of all such transactions over a certain period of time, say past 10 minutes, are held together in what is known as a block. The block now consists of recently initiated transactions waiting to be confirmed. Based on the information available in the block and a few other pieces of data, the miner’s computing setup has to keep supplying inputs, one of which satisfies the rules under which the block can be unlocked and the transactions can be verified. The block containing the confirmed set of transactions is now added to the block chain. The block chain is the publicly available ledger that contains information about every Bitcoin transaction that has ever occurred over the network.
An unverified transfer is instantaneous. Transactions with at least six confirmations are considered secure, though each confirmation happens with mathematical precision. Assuming one confirmation roughly every ten minutes, transactions take about 10 to 60 minutes to be considered final. The Bitcoin network uses a tight and secure encryption process called SHA256 double round hash verification to validate transactions. The first Bitcoin block to have ever been mined in 2009 is known as the Genesis Block.
All bitcoin payments are irreversible, but like cash, can be refunded by the recipient by initiating a new transaction. It is important to double check the address the funds are being sent to. The system will not let you complete a transaction if the receiving address is invalid.
Release of bitcoins has been cleverly designed to be time-bound, such that all the coins are not released at once to the mining rig with the greatest computing power. As the number of miners increases, so does the difficulty or the computing resources required to generate new bitcoins. The system is designed such that new coins are released roughly every 10 minutes, about 25 as of now. The rate of generation halves every four years until all the bitcoins have been mined. 21 million will be the highest number of Bitcoins that will be ever mined by the year 2140.
So far, roughly over 13 million bitcoins of the pre-determined 21 million have been mined. The difficulty of mining is adjusted automatically by the Bitcoin system to ensure that bitcoins are issued at a consistent rate. [/sociallocker]