What is a Block Reward? How is it Determined?

Key Takeaways 

  • Block rewards consist of newly created cryptocurrency tokens and transaction fees paid by users.
  • Blockchains like Ethereum use Proof-of-Stake (PoS) where users stake their existing cryptocurrency to validate transactions, eliminating the need for block rewards entirely.
  • The future of block rewards is uncertain. While Proof of Work (PoW) offers advantages like neutrality, PoS, and other emerging mechanisms are gaining ground.

What Is a Block Reward?

Think of cryptocurrencies as a public record of all transactions. Miners are the accountants who verify and add these transactions to the record, one group at a time. Each group is called a “block.” As a reward for their work and the computer power they use, miners get a little something extra: a block reward.

How Block Rewards are Determined

Block rewards incentivize miners in certain cryptocurrencies, like Bitcoin and Litecoin, to secure the blockchain network. These blockchains use a system called Proof-of-Work (PoW) where miners compete to solve complex puzzles. The winner gets their block of verified transactions added to the blockchain and a reward. This reward is a combination of newly created cryptocurrency tokens and transaction fees paid by users. The amount of reward varies depending on the blockchain, with Bitcoin’s reward halving roughly every four years to control the total coin supply. Some blockchains, however, like Dogecoin, have a fixed block reward. In essence, block rewards are a way to thank miners for their work in securing the network, and paying them new coins and transaction fees.

Blockchains With Block Rewards

Block rewards are a key incentive for miners in Proof-of-Work (PoW) blockchains. Here’s a breakdown of the top five by market cap:

  1. Bitcoin (BTC): The OG cryptocurrency uses SHA256 for mining and boasts a secure, tamper-proof blockchain structure. Bitcoin’s block rewards halve roughly every four years, with the next halving scheduled for April 2024. While the total supply is capped at 21 million, all bitcoins are expected to be mined by 2140.
  2. Litecoin (LTC): A Bitcoin fork, Litecoin uses Scrypt, an algorithm designed to be more accessible to miners with less powerful hardware. It shares similarities with Bitcoin in terms of total supply (84 million), block reward halving (every four years), and difficulty adjustment (every 2,016 blocks). However, Litecoin targets faster block times (2.5 minutes) for quicker transactions.
  3. Dogecoin (DOGE): Inspired by a meme, Dogecoin employs Scrypt and DigiShield algorithms with a unique approach to block rewards. Unlike halving mechanisms, Dogecoin miners consistently receive 10,000 DOGE per block, and the total supply has no ceiling. While inflation exists, it’s theoretically decreasing year-on-year.
  4. Bitcoin Cash (BCH): This Bitcoin fork uses SHA256 and shares its 21 million coin limit. However, Bitcoin Cash has slightly shorter halving cycles compared to Bitcoin. Its next halving will reduce block rewards from 6.25 BCH to 3.125 BCH.
  5. Ethereum Classic (ETC): A fork of Ethereum, Ethereum Classic maintains a PoW system with block rewards. The blockchain’s supply is continuously decreasing, with block rewards cut by 20% for every 5 million blocks (called a fifthening). The next tightening is expected in May 2024, reducing rewards from 2.56 ETC to 2.048 ETC.

These top PoW blockchains showcase different approaches to block rewards, highlighting their impact on miner incentives, coin supply, and transaction processing times.

Blockchains Without Block Rewards

Block rewards, a staple of Proof-of-Work (PoW) blockchains, aren’t the only way to incentivize network participation. Here’s a look at alternative consensus mechanisms and their reward structures:

  • Shifting the Paradigm: Blockchains like Ethereum (which transitioned from PoW to Proof-of-Stake (PoS) in September 2022) showcase alternative approaches. These blockchains utilize PoS and Delegated Proof-of-Stake (dPoS) mechanisms with their own set of participants and reward systems.
  • Earning Through Staking: In PoS and dPoS, participants don’t compete to solve puzzles. Instead, they “stake” their existing cryptocurrency holdings. This staking allows them to validate transactions and earn rewards in the form of newly created cryptocurrency.
  • Delegated Proof-of-Stake (dPoS): Here, users delegate their tokens to other running nodes (called delegates or witnesses). Those with the most delegated stake get chosen to validate transactions and secure the network. They receive rewards for their work, which can then be shared with the stakers who delegate their tokens.
  • Staking Rewards vs. Block Rewards: While similar in incentivizing participation, staking rewards and block rewards differ:
    • Origin: Block rewards are created by the network itself as a predetermined amount of new tokens awarded to miners who validate blocks.
    • Purpose: Block rewards incentivize miners to invest in computational resources and contribute to network security. Staking rewards are generated from transaction fees paid by users.
    • Distribution: Block rewards go directly to miners who solve the cryptographic puzzle. Staking rewards are distributed to validators chosen by the network, who often receive transaction fees.

Therefore, blockchains have evolved beyond PoW and block rewards. Staking rewards in PoS and dPoS blockchains offer a different model, encouraging participation through cryptocurrency holdings and rewarding validators for securing the network.

Final Thoughts

Block rewards, the cornerstone of Proof-of-Work (PoW) blockchains like Bitcoin, might be on shaky ground. Currently, miners compete for these rewards to secure the network. However, blockchains like Ethereum have adopted Proof-of-Stake (PoS) where users stake their existing cryptocurrency to earn rewards, removing the need for block rewards altogether. While PoW offers neutrality, the rise of PoS and other mechanisms suggests block rewards may play a less significant role in the future of blockchain security.

Via: 2Usethebitcoin.com

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