HOW CRYPTOCURRENCIES ARE CREATED
Unlike paper money that is endlessly printed, cryptocurrencies are mined...
Cryptocurrencies are created through a process known as mining. Mining is the validating of transactions (buy/sell) by solving complex mathematical problems using heavy, specialized computers. Miners who successfully verify these transactions obtain cryptocurrency as a reward (block rewards).
When you make a transaction using fiat, these transactions are recorded by banks and P.O.S systems. Cryptocurrency miners achieve the same by recording these transactions in blocks on a public distributed ledger called the “blockchain”.
Let’s look at it this way;
Once I send out a transaction, it is broadcast in the network, from one peer to the other (decentralized). This transaction, even if not confirmed yet, is known almost immediately by the whole network. A transaction remains pending until it is confirmed. Then it becomes an irreversible, unforgeable record on the blockchain. It’s only a matter of time until a transaction gets confirmed.
Note that some blockchains have faster confirmation times ranging from seconds to minutes. It is the job of miners to confirm transactions. And for this, they receive block rewards of that cryptocurrency (e.g. Bitcoin).
In the case of bitcoin, this “block reward” is halved every 210,000 blocks/ 4 years. The two previous halvings occurred in 2012 and 2016 which saw block rewards reduced to 25 and 12.5 respectively.
The next bitcoin halving at the time of writing will happen in May 2020 which will reduce block rewards to 6.5.
Halving reduces the rate at which new cryptocurrency units are created, thereby reducing inflation, causing scarcity and a coincidental increase in value over time. This is a core difference between cryptocurrencies and traditional currencies.
However, most cryptocurrencies are actually pre-mined and released at the genesis block (the first block of a blockchain). Cryptocurrencies are pre-mined for a number of reasons, one major reason being that it’s what’s being sold to the public during ICOs (Initial Coin Offerings).
I hope you understood the concept of mining and cryptocurrency creation.