Block Reward Meaning

What is a Block Reward?

A blockchain constitutes of a sequence of individual blocks that contain transaction records. Every block is associated with a problem that must first be solved before a new block can be generated and added to the protocol. Blockchain users who solve these problems are rewarded with a portion of newly minted crypto. 

This unit of cryptocurrency assigned to the validators is known as a block reward or mining reward. The users responsible for validating the blocks are called validators or miners, depending on the blockchain’s consensus mechanism. 

They are used as a primary financial incentive for the miners participating in a blockchain. The system also serves as a way to release newly minted crypto into the market. This is done by assigning a portion of the newly minted coin to the validator who mines or proposes new blocks.

Blockchains use block rewards as an incentive to attract more miners to the network, thereby decreasing centralization. The more miners a network has, the more secure it is from miners conspiring to perform a 51% attack.

A block reward is composed of two components: transaction fees and the block subsidy, which goes to the miner. 

For instance, Bitcoin’s block reward was initially 50 BTC. Bitcoin’s maximum supply is capped at 21 million coins. This means that no more block rewards and new coins will enter the market after the maximum supply is achieved. Bitcoin uses a halving mechanism to decelerate the mining reward amount and maintain the supply-demand force. This means that Bitcoin’s block subsidy is reduced by half for every 210,000 blocks (which amounts to about every four years). Since its inception, Bitcoin’s block subsidy has halved three times.