Blockchain is the chain of blocks. A block contains a piece of information in an encrypted form such as a transaction and a hash for its identification. The blocks are connected to one another for security purposes. Overall, a blockchain is a distributed, decentralized ledger that stores information and can be shared across the network.
What is Block Reward?
A block reward is an incentive that miners get when they approve a transaction. It is a cryptocurrency that users usually get when they ‘mine’ a block. Mining is the process that cryptocurrencies use to generate new coins and verify new transactions. The block reward is made up of two components:
- Block subsidy: It is the main part of the reward. It is the number of new coins that are generated.
- Transaction fees: The other part is the fees paid by the transactions that are included in the block.
Often rewards are given to users if they solve a complex mathematical problem. For example, Bitcoin users get bitcoins when they verify the transaction successfully. However, the reward is cut to half approximately after four years or if the user has mined over 210000 blocks. This is done so that the value of the bitcoins increases and the demand remains strong. So rewards are fluctuating in nature. But still, the system has become popular because miners earn a financial benefit from mining activities.
What is Block Reward Used For?
As we all know, a block reward is an incentive given to the miners for the approval of transactions and also for solving complex mathematical problems. So they are the center of attraction both from a security as well as from an economic point of view.
- Security: The incentives that miners get, use to secure the network. As blockchain is highly decentralized, there is no involvement of a central authority who will secure the network. So it is the responsibility of the miners to secure the blocks.
- Economic: Block Rewards are the only ways to circulate the new cryptos in the market. Whenever a miner successfully validates a block, they are given rewards which are the native cryptos of the network. In this way, the new currency is circulated.
How are Block Rewards Created?
Suppose a user wants to make a transaction. A block for that transaction is created. The block is sent to all the users. The users validate the transaction. Upon successful transaction, the users involved in the decision-making get incentives. Protocols help in the distribution of incentives. Upon successful verification, the database is updated and the transaction is complete. It is to be noted that different projects yield different rewards so the reward is not fixed. Calculation of block reward depends on several factors like the total circulation of cryptos, the generation time of crypto assets, and transaction fees.
- Circulation of Cryptos: The rewards are given in native cryptocurrencies. So cryptos should be circulated in large numbers so that the values of the coins do not lose their value.
- Generation Time of CryptoAssets: It focuses on how much time the broadcast will be there. If the broadcasting of the network increases with time the value of the crypto asset decreases.
- Transaction Fees: More congested the network, the higher will be the transaction fees.
Why Is Block Reward Important?
The following are some of the reasons contributing to the importance of block rewards:
- Enhancement of decentralization: Blockchain is highly decentralized in nature. Users can use the currency if only the cryptocurrency is circulated and this is possible by block rewards. Therefore, its generation and control allow the creation of a decentralized economic system. When a user successfully validates a block, the protocols generate incentives for those involved in validation. The incentives are initialized by protocols as there is no involvement of central authority.
- Using the new coins: Block Rewards are also used if the system wants to issue new currency in the market. The coins that are generated can be used for other exchanges.
Pros of Block Reward
The advantages of Block Rewards are as follows:
- To secure the network: Users get the rewards so that they can secure the mining work.
- Financial Benefit: Financial independence is provided to the miners as they get the incentives that can be used for later purposes.
- More investments: People tend to invest more in cryptos so it also enhances massification. Therefore blockchains are becoming popular day by day
Cons of Block Reward
The disadvantages of Block Rewards are as follows:
- Varying Rewards: The incentives vary from project to project. There are different projects that offer different block rewards and reward schedules.
- Increase in costs: For mining special hardware is required. Often mining results in hefty electric bills thereby resulting in more loss than profit to miners thus leading to an increase in costs.
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