What is a Block Reward?

Only once the transaction is approved, can a new block be added to the blockchain and then the miner receive their reward, or block reward.

As you may know, in order for a Bitcoin transaction to be approved, a miner must approve the transaction before it becomes a permanent block in the blockchain. To do this, the private and public keys are correct and able to unlock the cryptographic message.

To approve and add blocks to the chain, a significant amount of computation power is necessary. The system is designed to reward the miner who is the first to successfully to add a block to the blockchain. This is because mining is costly.

This entire process is no small cost to the miner, so in addition to the fee, which is comparatively small, the miner is also given a reward of new Bitcoins.

Created in 2009, Satoshi Nakamoto set the currency to reach a maximum of 21 million Bitcoin. That means two things: first, that once all 21 million Bitcoins have been mined no more new Bitcoin can be created, or more correctly, mined. And second, at the point that the maximum Bitcoin is reached, the reward given to miners for transactions will be for the transaction fees alone.

For now, a successful miner receives newly minted Bitcoin each time a new block is mined.

Miners and Just Rewards

When Bitcoin was first devised a block was worth a 50 BTC reward. However, with the discovery of every 210 000 blocks, the block reward is halved. To mine 210 000 Bitcoins, it takes around four years. Adjusting the difficulty rate of mining, maintains this difficulty level.

The rate of mining is proportional to the difficulty and the hash rate. A new block is generated about every 10 minutes. And about 140 blocks are added to the blockchain daily, which is what the rate should be. The difficulty target is adjusted based on the network’s recent performance. This is to maintain the 10-minute generation average. The system is designed to adapt to the total amount of mining power that is available on the network.

If you would like to see what the current difficulty rate, you can go to BitcoinWisdom.

In 2012, the Bitcoin reward (or creation) was halved to 25 BTC. Then in 2016, the reward was again halved to its current level of 12.5 BTC. That means the reward size will get halved again to 6.25 BTC, by around 2020. Using this same factorization, after 64 iterations of halving the block reward, the block reward will eventually reach zero.

To make sense of the value of Bitcoin, it is always useful to compare it to the value of gold. The design of decreased Bitcoin creation is to maintain its value; just as scarcity is a quality gold possesses. If gold grew on trees it would not have the same value. If an infinite number of Bitcoin were created, there would be no potential in its long-term value.

So, the difficulty rate of mining works to maintain Bitcoin’s scarcity to ensure its value. Like any currency, if you just keep minting more money you are just flooding the market, and the currency does not have any substantive value.

That means that mining Bitcoin is a competitive business.

Here’s how that goes:

As soon as a transaction is made from a Bitcoin wallet, it is sent to the decentralized network. Miners then compete to approve the transaction, add the block and reap the rewards; transaction fees and newly minted Bitcoin.

To do earn the block reward, first, the miner must verify 1MB (megabyte) worth of transactions, or more, depending on the total data size of the transaction. Transactions come in all sizes and amounts. Still, this first part is relatively easy for the miner.

Then, once a miner has verified 1 MB of Bitcoin transactions, they are (currently) eligible to win the 12.5 BTC. However, verifying the transaction only makes a miner eligible to earn Bitcoin. Just because a miner verifies a transaction does not mean they will get the reward.

In order to earn Bitcoin, a miner needs to satisfy a few more conditions.

For the miner to receive the reward of new Bitcoin is they must be the first to arrive at the target hash. That is, they need a hash that is a 64-digit hexadecimal number which is less than or equal to (and so not greater than) the target hash.

The more challenging part of mining is the process of proof-of-work.

To be the first miner to arrive at the right answer to a numeric problem means the miner is the first to have completed the computational work. Proof is obtained if a miner finds a new block that has the hash of the previous block. The block is validated once a consensus is reached amongst the majority of nodes. Only then is the block permanently added to the blockchain.

Read more about proof-of-work here on our blog.

Similar to Bitcoin, Ethereum uses an incentive-driven model for mining. In terms of Ethereum’s rewards, the successful miner receives 3 Ether, all of the gas with the block, and an extra reward for including Uncles as part of the block. Ethereum’s model borrowed many things from Bitcoin’s design, but also has some significant differences.

To learn more about Ethereum’s cryptocurrency Ether, you can check out: What is an Altcoin.

Striking Gold

A successful proof-of-work essentially relies on the availability of computational power. So, if your computer is able to process and guess at the hash faster than any other miner’s, then you may be successful. And only once a miner has found the target hash will they be rewarded with new Bitcoins.

As you can imagine, mining Bitcoin today has a few significant costs, both the hardware that can perform computations at competitive rates and the energy costs to run them are more than the current value of one coin. That means that not only is there a serious initial investment to competitively mine Bitcoin, but you will need to have enough seed money to cover the cost of the electricity to run these pools. As a consequence, there are pools popping up in areas of the world where energy costs are low.

Bitcoins are mined in pools because mining is costly. If you would like to see what the top mining pools are you can visit Blockchain.com.

Initially, personal computers were able to mine for Bitcoin. However, as the necessary computational demands increase due to increased difficulty, so did the cost of the hardware and the electricity required to fuel them.

The success of the miner is dependant on having a high “hash rate”, which means processing many many variables very quickly. As I mentioned, it takes about ten minutes to mine a block. Basically what this means is that without enough computing power you will not likely be a successful Bitcoin miner.

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