What is block reward? All about Block Reward

Decentralized digital currencies use the blockchain to verify transactions and maintain network security, rather than relying on a third-party entity such as a bank. In these blockchains, people are needed to participate as validators and creators of transaction blocks. In order to encourage people to participate in the mining and staking process, a reward is considered for them, which Block reward or block reward.

Of course, this is a basic and perhaps confusing definition of the block reward concept. In this article, we will examine in more detail that What is block reward? And what role does it play in the crypto world? Stay with us.

What is block reward? Block reward in proof-of-work networks

Block reward (Block Reward) Or Block reward To Digital currencies It is said that if made A successful one block And Adding it to the blockchain you get Block reward indeed Incentive for miners to participate in Validation of transactions And Maintain network security Is. This reward is in the form of Network native coin It is paid and has two main advantages: it distributes the desired digital currency in a decentralized manner and encourages more miners to participate in increasing the security of the network.

Proof of work or mining is considered as a security mechanism in the digital currency network, whose main purpose is to prevent cyber attacks on the network. In this mechanism, any person who wants to work as a miner in the network and earn money, must allocate the processing power of their hardware to the network and try to solve a mathematical equation with that processing power.

In this way, if someone wants to attack the blockchain, he has to have more processing power than the rest of the miners, which, considering the high number of miners, will be very difficult and has no economic justification.

This mechanism is used in the blockchain of some of the largest digital currencies. Bitcoin, Litecoin, Bitcoin Cash, Monero and Dash are some of these digital currencies. For example, the processing power (hash rate) of the Bitcoin network at the time of updating this article is over 480 million Terahash per second (TH/S).

This means that if someone wants to attack and manipulate the Bitcoin blockchain, they have to provide at least 245 million terabytes of processing power, which is almost impossible for one person to do in today’s world. In the following, we will examine the concept of block reward in the Bitcoin blockchain; But in most digital currencies, a similar process is going on.

Read more: What is hash rate (HashRate) or hash power? + Video

Block reward in the Bitcoin blockchain

The block reward in the Bitcoin network is the amount of Bitcoin that is generated by the creation of each block (every ten minutes) and is awarded to the miner. Now, reward each block 6.25 units Bitcoin is that Every four years (after mining every 210,000 blocks), during an event called Having is halved

In the Bitcoin network, very high computing power is needed to verify and add blocks to the chain. A miner who provides the computing power of his hardware to the network must spend money to provide this computing power. As such, these costs must be covered to motivate miners. Blockchain network to cover these costs to miners reward Gives.

According to the Bitcoin protocol, the first successful miner to create a valid block to connect to the blockchain receives a reward. This reward is in exchange for the significant cost that the miner spends to mine the block. Therefore, in addition to the transaction fee, which is relatively small, the miner receives new bitcoins in the form of block rewards.

Block rewards have two advantages for the Bitcoin network. The first advantage is that it gives miners the necessary incentive to secure the network in exchange for rewards. The second advantage is that the reward process over time causes new bitcoins to enter the cycle, bringing all bitcoins into the market cycle over several years.

Bitcoin network block reward over time

When Bitcoin was created in 2009, Satoshi Nakamoto set up the network to produce a maximum of 21 million coins. This expresses two issues. First, once all 21 million bitcoins are mined, no new bitcoins will be produced, or rather mined. Second, when the number of bitcoins reaches its maximum limit, the block reward will only be the transaction fee.

Read more: Why is the supply of Bitcoin limited to 21 million units?

At the beginning of Bitcoin, the block reward was 50 units of new Bitcoin. However, after every 210,000 blocks are mined, the block reward is halved during an event called a halving. It is estimated that it will take about four years to mine 210,000 Bitcoin blocks. This duration remains roughly constant by adjusting the mining difficulty rate.

In 2012, the reward for mining each block of the Bitcoin network (block reward) during the halving event was reduced to 25 units. Then in 2016, block reward was halved again to 12.5 units. The third halving event happened on May 11, 2020 (May 22), during which the block reward reached 6.25 Bitcoin units.

Now that we are updating this article, less than 5 months to The next halving The Bitcoin network remains. This event will occur in April 2024, during which the block reward of the Bitcoin network will decrease to 3.125 Bitcoin units.

The importance of block reward

We said that the security of the Bitcoin network is provided by miners. These miners receive a reward in the form of block reward during their activities. Block reward is considered as a very important mechanism in the Bitcoin network, which ensures the long-term survival of this digital currency by motivating miners.

To better understand the value of Bitcoin, it always works to compare it to the value of gold. The gradual reduction in the amount of Bitcoin production is designed to maintain the value and price of this digital currency; Just as rarity is the characteristic of gold. If gold was not rare, it would never have its current value. If the number of Bitcoins that could be produced were also infinite, Bitcoin would have no potential to maintain its long-term value.

On the other hand, if the computing power of miners increases, the production process of each block will be reduced to less than 10 minutes. This reduction in block production time leads to an increase in the speed of Bitcoin supply, and as a result, Bitcoin loses its value in the long run.

For this reason, the difficulty of the Bitcoin network (difficulty of mining) means that if the computing power of miners increases, the time to create each block will still be around 10 minutes.

Therefore, the mining difficulty rate is adjusted to maintain the scarcity feature of Bitcoin to prevent the price of this digital currency from falling. If Bitcoin or any other currency is only produced and marketed, it will no longer have any special value. This makes Bitcoin mining competitive.

How to receive block reward in the Bitcoin network can be described as follows:

• A request for a Bitcoin transaction is formed;
• This transaction is sent to the Bitcoin decentralized network;
• Miners put a set of these transactions in blocks with a volume of about one megabyte;
• The block reward is awarded to the first miner who can extract that block.

Permanent reward with mining pools

It was said above that the first miner who reaches the answer to the block equation will receive the block reward, which is now 6.25 units in Bitcoin. But today, with the expansion of the Bitcoin network and other digital currencies, direct mining is not possible for more than 90% of miners.

If you buy a bitcoin mining machine now and connect it directly to the network, you probably won’t be able to get block rewards for thousands of years; Because there are many competitors who have invested hundreds of millions of dollars in this sector.

For this reason, most miners connect to a mining pool to mine bitcoins and other digital currencies. A mining pool is a virtual locale where miners share their processing power with each other and all work together to mine a block.

In the end, everyone benefits according to their processing power. In other words, miners give their processing power to the mining pool, and the mining pool works on behalf of the rest of the miners to receive block rewards. The main advantage of the mining pool is to provide the possibility of permanent and permanent income for the miners.

Block Reward in Proof of Stake Cryptocurrencies

Despite all the benefits, the proof-of-work mechanism is not without problems. One of the alternative solutions to maintain the security of blockchain networks instead of mining, is a mechanism Proof of stock Is.

The main idea in this mechanism is that participants can contribute their assets to the network instead of spending a lot of money to buy mining machines. The network then randomly allows one of the participants to validate the next block at certain intervals. Obviously, the more digital currency a person allocates to the network, the more rewards he receives.

To attack networks based on proof of stake, the attacker needs to have more than 50% of the units of a digital currency, which is difficult to provide such amount of capital due to the distribution of wealth and lack of sufficient supply. Also, if it is impossible for someone to have such capital, by attacking the network, its value will fall drastically, and the attacker himself will be the first to lose.

Therefore, in this mechanism, what determines the eligibility of a participant to verify the block is not the hash rate that he provided to the network; Rather, the validity of the validator is determined by the amount of coins he has invested. Ethereum, Polkadat, Tezos, Cardano, Binance Coin and Stellar are among the coins that use this mechanism.

The difference between rewards and fees in cryptocurrency mining

Mining reward is not the only thing miners receive from the network. In addition to the reward for producing new blocks (block reward), miners and validators also receive a transaction verification fee from the transaction parties.

For example, if you transfer some bitcoins from an exchange to your wallet, you will see that the amount of bitcoins deposited into your wallet is less than the amount of bitcoins you withdrew from the exchange. The difference between these two numbers is the transaction fee that miners receive.

Unlike the amount of reward that is fixed for each Bitcoin block and determined by the Bitcoin protocol, the amount of the fee depends on the congestion of the network and the user’s need to speed up the transaction.

Conclusion

In this article, we examined what block reward is and what its application is in blockchain networks. Cryptocurrencies rely on blockchain miners and validators to verify transactions and secure the network, rather than relying on centralized institutions such as banks. In order to encourage people to participate in this process, a reward has been planned for them.

In many digital currencies, for mining or verifying each block, the person who succeeded in creating and verifying the block is given a reward, which we call block reward.

In blockchains where a proof-of-work consensus mechanism is used for security, this reward goes to miners who have provided the processing power of their mining machine to the network. This mechanism is implemented in Bitcoin.

Also, in blockchains where the proof-of-stake consensus mechanism is used for security, the block reward goes to validators who have staked their coins in the network. This mechanism has been implemented in currencies such as Ethereum, Tezos, Cardano and Stellar.