What Is a Block Reward?
Block rewards play an integral role in the tokenomics of a cryptocurrency. Read on to learn what a block reward is and what role it plays in the Bitcoin protocol.
What is the Block Reward?
The block reward is newly minted coins paid to miners or validators as an incentive to keep a crypto network secure by verifying and processing transactions. When a network participant finds a new block in the blockchain, they receive the block reward.
The network participants that verify transactions in Proof of Work (PoW) networks, like Bitcoin, are known as miners. In Proof of Stake (PoS) networks, they are referred to as validators or stakers.
In the Bitcoin ecosystem, the block reward incentivizes miners to direct computing power towards securing the Bitcoin network. The current block reward is 6.25 bitcoin per transaction. This reward cuts down by half every four years or every 210,000 blocks in what is known as the Bitcoin halving. Miners also receive transaction fees as part of their reward for securing the integrity of the Bitcoin network.
The reduction of the block rewards is part of Bitcoin’s mechanism to slow down the introduction of new coins into the circulating supply, which helps to power the cryptocurrency’s deflationary monetary policy.
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How Do Bitcoin Miners Earn Block Rewards?
Miners earn block rewards for verifying transactions on the Bitcoin blockchain. When miners confirm transactions, they are bundled into blocks, and a new block is added to the previous set of blocks on the blockchain.
We’re currently at 19.1 million bitcoin out of 21 million bitcoin in circulation. This means that there are slightly less than 2 million more bitcoin to mine into circulation. When the last bitcoin is mined by 2140, miners will only earn transaction fees because new bitcoin can no longer be mined. For now, however, bitcoin miners will continue earning the fixed block reward and transaction fees.
One thing to note about transaction fees is that they vary from one blockchain network to another. Also, users can be higher transaction fees if they want their transactions to settle faster. The higher the fee you add to your cryptocurrency transaction, the faster it will be confirmed.
How Do Validators Earn Block Rewards in Proof of Stake Networks?
In a Proof of Stake network, validators stake the network’s native token to take part in the blockchain’s consensus protocol to verify and process transactions.
Validators are then selected at random to validate transactions by the consensus protocol to mint new coins.
The amount paid out to validators depends on the percentage of the total staked amount of coins they hold. The more coins they stake, the higher their share of the paid-out block rewards.
The block reward depends on the specific blockchain as different PoS chains pay different block rewards.
The Role of Block Rewards in Bitcoin’s Tokenomics
Block rewards are important because they act as an incentive for miners to secure the network. Every new transaction confirmation adds to the longest chain of transactions. Consequently, this makes sure that miners uphold only the correct chain of blocks in the network.
Additionally, block rewards control new currency issuance. The block reward system, by determining how new coins circulate, plays an essential role in the Bitcoin protocol’s monetary policy, creating deflationary pressure by slowing down the speed at which new coins are entering circulation.
The regular reduction of the Bitcoin block reward is one of the genius features of Bitcoin, which has helped it to increase in value over the years as increasing demand has been met not only with a fixed coin supply but also with a slowing down of new coins entering circulation. This has resulted in upward price pressure.
FAQs
What do I need to start bitcoin mining?
To start bitcoin mining, you need to set up bitcoin mining hardware and install mining software. You also need a stable internet connection and power to run your mining machines. After that initial cost, you also have to keep electricity costs and maintenance expenses in mind. Bitcoin mining increases in difficulty, which is one of the reasons behind the high cost of mining. It was far cheaper in the early days to mine bitcoin.
Is bitcoin mining worth the block rewards?
We can estimate the current return of block rewards at about $143,000 if we multiply the $23,000 per bitcoin by 6.25 bitcoin. However, this isn’t a fixed income. It’s important to factor in the setup and maintenance costs to justify starting out. You also need to keep in mind that market conditions and mining difficulty change, affecting mining profitability.
When will the next halving be?
We can expect the next halving event in 2024, as the previous one was in 2020. The block reward after the halving will be 3.125 bitcoin.
