Block Reward

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What Is A Block Reward?

A block reward refers to a form of incentive given to cryptocurrency miners for contributing to computing power towards the maintenance of the blockchain network. The primary aim of the block reward is to motivate miners to continue participation in the blockchain network plus maintain its integrity and security.

Block reward plays a vital role in the proper functioning of blockchain networks by arranging the required resources and miners’ efforts by incentivizing them. It also ensures that the network has an active pool of miners to keep it secured. It contributes to the stability and reliability of blockchain networks by ensuring their continuous operation.

What Is A Block Reward?

A block reward is a type of reward offered to cryptocurrency miners in exchange for their contribution of processing power to the upkeep of the blockchain network.
The fundamental goal of the block reward has been to keep miners active within the blockchain network while helping uphold its security alongside integrity.
It may lead to the consolidation of mining power amongst a few large mining pools while rewarding miners with Bitcoin for maintaining network security and verifying transactions.
In contrast to the transaction fee, which refers to the fees users pay to the miners in order to have their transactions prioritized by the miners, it signifies the incentive granted to miners for verifying and putting transactions into the blockchain network.

Block Reward Explained

A block reward is the quantity of cryptocurrency that miners receive for their successful addition of new blocks to the network of blockchain and verifying them, too. For various cryptocurrency networks, miners get the corresponding cryptocurrency. For the Bitcoin networks, bitcoins are the reward for miners. Moreover, it has the characteristic of reducing the incentive system over time.

Hence, the miners who participate in the process of adding new blocks to the network by solving complex mathematical problems, receive equal distribution of the rewards. Block rewards are of two types:

#1 - Coinbase Transaction

It is the first transaction in every block, leading to new coin generation. This goes to the miners who have added the blocks to the blockchain.

#2 - Transaction Fee

Here, the miners who collaborated in adding new blocks get some of the fees users pay to send their transactions throughout the network.

Moreover, cryptocurrency mining involves a lot of energy and requires huge computational power to add every new block to the network. Furthermore, the miners have to solve quite a complex mathematical problem called the proof of work for adding new blocks to the network. Block rewards compensate miners for investing in extensive electricity usage and powerful hardware for adding fresh blocks to the network.

As a result, it adds to cryptocurrency’s decentralized nature and security by maintaining network consensus among diverse teams of miners who then get a blockchain reward for their contribution. Nevertheless, these rewards have a halving nature. This means that the reward for every block added is halved every four years or after a predetermined cryptocurrency has been mined.

It leads to inflation control of the cryptocurrency and ensures that the total quantity of cryptocurrency does not exceed a safe and predetermined level. For instance, Bitcoin mining offered fifty coins to its miners, but subsequent halving reduced the reward to 6.25 in 2020. Miners can use a block reward app to figure out earnings estimates.

Examples

Let us use a few examples to understand the concept properly.

Example #1

In the case of the Litecoin (LTC) blockchain, the blockchain reward was initially set at 50 LTC per block, and this reward is halved every 210,000 blocks. As of May 2023, the Block-Reward has reduced to 6.25 LTC per block.

Example #2

On July 24, 2023, a 2010 block reward got transferred after being dormant for more than thirteen years. It has created huge intrigue among the cryptocurrency community despite the involvement of only 50 bitcoins, in value of 1.4 million dollars. The event and its intrigue show the scarcity of such huge expenditures in the market scenario.

Furthermore, the transaction was far from confidential, as it got a low score of five out of 100. It happened because of diverse inputs and the sweeping of the funds. Consequently, the current block reward was the ninth such event of expenditure in 2023, where the last transaction for the transfer happened on June 26, 2023.

Pros And Cons

Let us use the table below to understand the block reward’s pros plus cons:

Pros	Cons
It rewards the miners with cryptocurrency for securing the network and validating the transactions.	Consensus mechanisms are needed to estimate the appropriate and adjust the block reward over time.
A block reward keeps guard of the security and integrity of the blockchain network.	It may lead to inflation if the Block-Reward does not get reduced over time.
It also maintains the reliability and stability of the blockchain network.	Consensus mechanisms are needed to estimate the appropriate and adjust the Block-Reward over time.
It awards a greater share of the cryptocurrency supply as a reward to early adopters.	Transaction fees get neglected for payment by the miners as they entirely rely on making Block-Reward the main source of income.
It serves as a readymade mechanism for the introduction of fresh cryptocurrency in circulation.	Consensus mechanisms are needed to estimate the appropriate and adjust the block reward over time.

Block Reward vs Transaction Fee

Let us look at some key differences between the two using the table below:

Block Reward	Transaction Fee
It means the reward given to miners for validating and adding the transactions into the blockchain network.	It refers to the fees paid to the miners by the users to get their transactions prioritized by the miners.
The reward amount per block mined by the miners is fixed, which may decrease over time.	It keeps fluctuating as per the changes in market demand for the block space.
Miners get a constant source of revenue from mining cryptocurrencies in the blockchain network.	Miners do not get any fixed revenue as income, but their income keeps fluctuating and remains ambiguous.
Early adopters of blockchain technology get more share of the cryptocurrency supply.	It comes as a cost to use the network at any point in time.
It motivates miners to secure the network.	A transaction fee ensures the prevention of spam and transaction prioritization.
It may lead to the inflation of cryptocurrency over time if not checked for adjustment.	It does not affect the supply of a cryptocurrency, thereby, no effect on inflation.
A block reward leads to the centralization of mining power.	It does not impact the security of the decentralization of the network.
Miners get most of their revenue from here.	As the block reward decreases, the transaction fee importance decreases considerably.

Frequently Asked Questions (FAQs)

1. How to get a block reward?

If one has to get a block reward, they have to become a miner and validate transactions to add them to the network. After successfully adding the blocks to the network, the miners receive a prefixed amount of cryptocurrency. The reward amount decreases by a factor of half for every new 210000 blocks created or every four years.

2. How does the Ethereum block reward work?

It works exactly like other cryptocurrencies but has a different method of calculating the reward. In the case of Ethereum, the average of the rewards per block is calculated. In other words, the total of all the rewards divided by the number of added blocks gives the exact value of the block reward of Ethereum, which ranges in the range of 0.29 E.

3. How much was the original Bitcoin block reward?

Over the years, the bitcoin's rewards have undergone numerous reductions, which started with giving fifty bitcoins as a reward. However, after the event of the first halving, the reward went down to twenty only. Then, in subsequent halving events, it finally got reduced to 6.25 bitcoins as of 05-11-2020.

4. Is block reward legit?

The block reward is a legitimate component of the Bitcoin network since it is a prearranged incentive system that compensates miners for adding new blocks to the blockchain. Moreover, this function serves to secure and preserve the network. Furthermore, the reward has undergone a series of reductions over time through the process of halving, which is an essential aspect of Bitcoin's monetary policy.