Block rewards are cryptocurrencies that are paid out to users, or pools of users, in exchange for these users maintaining the cryptocurrencies blockchain network by determining which new blocks are valid and adding them to the blockchain.
These rewards can consist of new cryptocurrency coins or tokens, as well as transaction fees that users pay to add transactions to the blockchain. Transaction fees can vary depending on the number of transactions being sent on the entire network at any given time, so more network traffic can mean higher fees.
Each cryptocurrency sets its own block rewards, while some cryptocurrencies, such as Ripple and some stablecoins, don’t offer any block rewards at all.
Block rewards are new tokens and/or transaction fees paid to users to help incentivize them to maintain the integrity of the blockchain.
Different cryptocurrencies will have different systems of rewarding users. Some cryptocurrency networks don’t pay any block rewards or transaction fees at all.
Block rewards are important as they ensure the overall security of the cryptocurrency blockchain.
Block Reward Structures
For those cryptocurrencies that offer block rewards, their network consensus protocols will largely dictate the block reward structures. Let’s examine the two most common protocols – mining and staking.
Proof-of-Work Systems (aka Mining)
The most famous and one of the earliest cryptocurrencies is Bitcoin. Miners on the Bitcoin blockchain race to solve proof-of-work (POW) problems. If a miner produces a block that is approved by an electronic consensus of nodes, the miner is rewarded with a specific number of coins AND any transaction fees on that block.
At present, the node that solves the block hash is awarded 6.25 new Bitcoins, but this figure is adjusted lower over time as we approach the limit of 21 million BTC that is built into the principles of Bitcoin.
Below are the historical block rewards dating back to the start of Bitcoin in 2008:
2012 25.00 BTC
2016 12.50 BTC
2020 6.25 BTC
This halving will continue until the last block and coin are mined. With each block of Bitcoin being mined in 10 minutes, the last coin is predicted to be mined in 2140.
However, the transaction fee is entirely something else and is offered by the person sending the Bitcoin. If you don’t submit a Bitcoin transaction with enough fees to entice the miners, your transaction may have a real risk of getting ignored in favor of transactions with higher ones. Therefore, it is possible your payment could end up incomplete in a long list of unconfirmed transactions until there is a lull on the Bitcoin blockchain and miners have nothing else to do.
Hence, there is a large incentive for mining Cryptocurrencies that operate with a POW protocol, such as Bitcoin.
The idea of Bitcoin mining pools rose to tackle the issue of rising mining difficulty. A group of miners pools their computing power together to mine for Bitcoin collectively. If the pool successfully solves a block, all miners in the pool will be allocated Bitcoin in proportion to how much computing power they contributed.
The odds of one single mining rig receiving a block reward are low, but those odds skyrocket when you pool together thousands of rigs. Mining pools are now considered essential to getting any shot of successfully mining Bitcoin.
This incentive has driven miners to move from using an old spare laptop to GPU’ rigs’ to huge ‘farms’ with hundreds of specialized Application-Specific Integrated Circuit (ASIC) machines, consuming massive amounts of electricity. This has led many detractors of proof-of-work cryptocurrencies to claim that mining is an environmental disaster.
Proof-of-Stake Protocols (aka Staking)
In response, there are more and more cryptocurrencies that are using a Proof-of-Stake (POS) protocol. Blocks are formed through staking as opposed to “mining” under the “proof of work” protocol. Users are called validators (rather than miners) who mint crypto.
In order to be considered as a validator for a POS system, the node must put up some of the cryptocurrency they own as a sort of pledge or guarantee for proper behavior.
This is called staking, and the cryptocurrency pledged entitles the node to be considered but is not necessarily guaranteed to be selected randomly as a validator.
Prospective validators will need to stake 32 Ethereum to be considered at random by an algorithm to create blocks or to help validate blocks that they didn’t create.
If you are selected as a validator, you are then asked to create blocks when chosen, and you will receive block rewards in the form of new tokens and/or transaction fees.
The amount of cryptocurrency pledged serves as a way to incentivize good behavior, as anyone who attests to malicious or wrong blocks or deliberately colludes with other bad actors loses their stake. You may also lose part of your stake if you fail to carry out your validation duties, say, by going offline. This is called “slashing.”
As opposed to computing power in a POW system, if someone were to try to take over a POS blockchain, the attacker would need to control 51% of the cryptocurrency. So if they were successful in launching a 51% attack, the value of the cryptocurrency they own would plummet, causing a massive financial loss for them and serving as a disincentive for any attack.
The Ethereum network was designed as a DeFi platform, and so it was designed to charge a transaction fee for any usage of its blockchain, including creating DApps, a smart contract, or simply transferring ownership of either from one party to another. This fee is called gas, and it’s denominated or charged in Ether, the native token of the Ethereum network.
As part of the Ethereum Improvement Proposal 1559 (EIP 1559), users pay a base fee for transactions to be included in the next block. But can also add a tip to get their transaction prioritized.
Additionally, in order to use the Ethereum network, users expend an amount of gas like how one requires fuel to operate a car – except in Ethereum, gas pays for the computational effort required to execute specific transactions or operations on the network. Gas fees are meant to keep the Ethereum network secure by keeping bad actors from spamming the network.
Once the gas is paid in the Ethereum transaction, it gets used up or burned, reducing the amount of Ether outstanding. This means that Ether is an inflationary cryptocurrency. What’s left is paid to the successful validator as block rewards for their efforts.
Finally, block rewards may not always be paid in the same token being transacted on its blockchain. Stablecoins are a common example of this. In order to maintain their value steady against their fiat currency peg, they must carefully control token supply. Therefore, they often reward their miners with a different native token.
A famous example was the Terra network, which before going bust in 2022, would reward users with its freely floating LUNA token but not with their TerraUSD stablecoin.
Thank you for reading CFI’s guide to Block Rewards. To keep learning and developing your knowledge base, please explore the additional relevant resources below: