Questions asked about Bitcoin mining often come from those wanting to know, in general, “What is the purpose? Why is it necessary to have all these computers crunching away?”.
This can be answered with the help of the photo above. What occurred there, allegedly, is what might be called a “double spend” attack. The photo shows metal tungsten used as a substitute for the vastly more expensive gold.
In this instance, the value for a 1000g bar of gold was exchanged, but some amount – between 30% to 40% of that gold expected to be inside was during that time instead held elsewhere. It was held in the hands of the perpetrator of the crime.
More commonly the words that describe this are “counterfeit” and “fake” but the intention of the perpetrator is the same – to deceive the buyer in order to acquire money through fraudulent means.
At a high level, the Bitcoin mining network exists to ensure that Bitcoin’s networked accounting ledger, a type of transaction register database known as a blockchain contains no Bitcoin funds that have been double spent.
For most accounting and banking systems, this is a trivial function. There is normally a database holding the master records which acts as the authority on the amount any account has available to withdraw or spend.
The “authority” for Bitcoin comes from whatever exists in the latest transaction register (blockchain). That transaction register blockchain is built by the miners. The mining activity ensures that transactions being placed into the blockchain follow the rules of the Bitcoin protocol.
The reason lots of mining is needed is so that an individual or group attempting to do the equivalent of stuffing tungsten into the drilled holes is not successful in defrauding anyone.
The end result is that every Bitcoin node stores a copy of this trusted transaction register blockchain and can easily verify that each bitcoin used in a transaction has not previously been spent. Free, open source software (FOSS) software is what enables double spend protection for Bitcoin. It means Bitcoin is a much less costly system than one that requires a GE Phaser XS for protection.
[Update: More tungsten-filled gold bars were reported in September, 2012 by a reputable gold dealer in NYC, as was reported on ZeroHedge.]