Block Reward

What is a Block Reward?

A block reward is a newly minted cryptocurrency awarded to a user who successfully mines a new block.

The Long Definition

Block rewards are newly minted cryptocurrencies awarded to successful miners. They are a major feature of blockchains that rely on miners to validate transactions. These types of blockchains typically use the proof-of-work (PoW) consensus mechanism.

Block rewards should not be confused with transaction fees. Transaction fees are also awarded to miners. But they come from the fees a network charges on transactions and are paid by blockchain users.

Why Are Block Rewards Important?

A blockchain is a decentralized ledger of transaction data. For the network to function as intended, it’s important to verify this data and keep the ledger up to date. This happens through a consensus mechanism.

Different blockchains have different consensus mechanisms. One of these is proof of work (PoW). PoW involves solving complex math problems and creating new blocks of verified transactions. You might know it by another name: mining.

But, a blockchain is decentralized. So, there is no single person or organization employed to mine blocks. Instead, blockchain networks rely on users voluntarily participating in the network. These users are known as miners.

However, mining is costly. The hardware alone can cost up to $20,000. On top of that, mining equipment consumes a lot of energy, leading to high energy bills. So naturally, miners won’t mine blocks for free. They need incentives.

This is where block rewards come in. Block rewards incentivize miners to continue validating blocks. They’re like a miner’s salary.

Note that block rewards are newly minted tokens. Therefore, they also serve as a way for the network to release new tokens into circulation.

Block rewards vs. transaction fees

Block rewards are issued to miners who add blocks to a blockchain. Transaction fees are given to miners who verify transactions on a blockchain.

Usually, the process of adding a block involves verifying transactions. Thus, the miner will receive block rewards plus the fees for the transactions they’ve validated.

To draw a clear distinction, think about what happens when you buy crypto: you pay a transaction fee. Depending on the blockchain, a part of this fee goes to the miner who verified the transaction. So, unlike block rewards, transaction fees don’t put new tokens into circulation.

Block Rewards Example

The Bitcoin blockchain issues block rewards in Bitcoin (BTC) to incentivize miners. Its approach is quite unique.

Bitcoin (BTC) is designed not to exceed a total of 21 million tokens in circulation. So, the block rewards get halved every 210,000 blocks. This helps limit the rate at which new Bitcoin tokens enter circulation.

When the blockchain launched in 2009, its block reward stood at 50 BTC per block mined. Four years later in 2012, this reward was halved to 25 BTC. There have been two halvings since the last one taking place in May 2020. It took the block reward from 12.5 BTC to 6.25 BTC. This amount is set to be halved to 3.125 bitcoins in 2024.

Eventually, block rewards will be too small to make mining Bitcoin profitable. By then, transaction fees will probably become the main incentive for those involved in validating the network.