Block Reward Definition, How They Provide Incentive, and Future

What Is a Block Reward? A block reward is a financial incentive given to cryptocurrency miners for validating blocks of transactions on a blockchain. The reward is typically a portion of transaction fees and cryptocurrency tokens newly minted by the blockchain network. Mining is the process of verifying and adding transactions to a blockchain, a distributed ledger that records cryptocurrency transactions. A block reward compensates miners for the computational energy and resources they expend to ensure the blockchain's operation and maintenance. KEY TAKEAWAYS Block rewards are incentives for cryptocurrency miners to verify a blockchain's transactions and secure the network. Block rewards compensate miners with newly minted cryptocurrency tokens in amounts calculated with pre-set formulas based on network activity, mining difficulty, and other factors. Blockchains with cryptocurrency mining and block rewards include Bitcoin, Litecoin, Ethereum Classic, Bitcoin Cash, and Dogecoin. How Block Rewards are Determined Widely used blockchains that rely on cryptocurrency mining and block rewards include Bitcoin, Litecoin, Dogecoin, Bitcoin Cash, and Ethereum Classic. These blockchains generally have a Proof-of-Work (PoW) consensus mechanism. A consensus mechanism is programming that dictates how participants in a blockchain network agree on the current state of the ledger. 1 In most PoW blockchains, transactions are validated and verified by full and partial nodes. Once verified, they are placed in a queue. The mining node picks up transactions, assembles a candidate block, and mines it. Each node mines the solution to the block it has proposed. Miners must solve a cryptographic problem to have their block added to the blockchain and create a new one. The solution to the problem (a hexadecimal number with lots of zeros in front of it) is proof that work was done to verify transactions and is included in the new block. The miner who solves the problem first receives the block reward. How much is rewarded to the successful miner depends on the blockchain. Generally, these blockchains are programmed to give the miner a specific amount of cryptocurrency plus the fees paid by the transactions. For example, Bitcoin's block reward is 6.25 bitcoins plus mining fees. This reward will be cut to 3.125 in April 2024. This is called a halving, which occurs about every four years (every 210,000 blocks). Dogecoin, another PoW blockchain, awards 10,000 DOGE but doesn't reduce the reward—at one time, it did, but at block 600,000, the reward amount became permanent. 2 Blockchains With Block Rewards There are hundreds of blockchains that use block rewards as incentives for participating in the network, but only a few are popular with investors, traders, and everyday users. Here are the top five proof-of-work blockchains by market cap. Bitcoin (BTC) Bitcoin's mining algorithm is Secure Hash Algorithm 256 (SHA256). This cryptographic hash function takes any data as input and produces a fixed-size output known as a hash, a cryptographic fingerprint for the block's data. Any change to the data, however minor, will result in a completely different hash, ensuring the blockchain is tamper-proof and all transactions remain secure. 3 Each block in the Bitcoin blockchain contains a block header with various data, including the previous block's hash, giving rise to a chain of interconnected blocks. This chain structure makes it difficult (but not impossible) to manipulate any block without altering subsequent blocks. 3 To create a new block, Bitcoin miners add a nonce (a number used once) to the block header and rehash it. The nonce is increased with each attempt until a miner generates a hash with a value below or equal to a specific target value. The target hash value for each Bitcoin block determines the mining difficulty and is adjusted every 2,016 blocks to maintain a consistent block generation time of 10 minutes. The size of Bitcoin block rewards, denominated in fresh BTC tokens, is halved after the creation of every 210,000 blocks, or around four years. At Bitcoin's inception in 2009, each block reward was worth 50 BTC. In May 2020, the Bitcoin block reward was halved a third time to 6.25 BTC. A fourth Bitcoin halving is scheduled for April 2024. As of March 2024, 19.67 million bitcoins were circulating, or more than 93% of the total supply of 21 million. 4 Bitcoin's block reward is scheduled to reach zero around May 2140, but mining will likely no longer be profitable. About 99.6% of bitcoins are estimated to be issued around April 2039, when the block reward will be just 0.19531250 bitcoin and transaction fees are expected to become the primary incentive for miners. 5 Litecoin (LTC) Litecoin, a fork of Bitcoin, employs Scrypt, a PoW algorithm intended to be more resistant than Bitcoin's SHA-256 algorithm to application-specific integrated circuits (ASICs), the architecture behind top-of-the-line mining hardware. 6 Due to the high costs of ASICs, resistance to ASICs makes blockchain mining more accessible to those with fewer financial resources and who can afford to buy cheap mining gear. 7 Litecoin has a total supply of 84 million litecoins, a mechanism that decreases the block reward by 50% approximately every four years, and a mining difficulty that adjusts every 2,016 blocks, or roughly every two weeks, mirroring Bitcoin's fixed supply, reward halving rate, and difficulty adjustment timing. 8 However, Litecoin's mining difficulty adjustment maintains an average target block time of approximately 2.5 minutes, the time that the network aims to generate a new block and add it to the blockchain. 8 Litecoin's target block time is significantly faster than Bitcoin's target block time of 10 minutes, contributing to more efficient transactions. Litecoin's block reward is 6.25 LTC per block as of the date of Litecoin's last halving, with the next expected sometime in 2027. The minimum Litecoin block reward is expected to be reached in 2142. New LTC cryptocurrency will continue to be mined until all litecoins are mined. 9 Dogecoin (DOGE) Dogecoin, a cryptocurrency blockchain inspired by the meme of a Shiba Inu dog nicknamed "Doge," runs on the Scrypt PoW and DigiShield mining algorithms and adjusts its mining difficulty for every block. 10 11 Dogecoin's target block time is always about 1 minute, allowing for slightly quicker transaction times than Litecoin's 2.5-minute block time and much faster transaction times than Bitcoin's 10-minute block time. 12 Additionally, unlike Bitcoin, Litecoin, and blockchains with halving mechanisms that gradually decrease block rewards, Dogecoin miners consistently receive 10,000 DOGE for every block they successfully mine, and the number of DOGE tokens in circulation and the total supply do not have ceilings. 12 Dogecoin's supply increases by 5 billion DOGE each year, theoretically resulting in a decreasing annual inflation rate. 13 Bitcoin Cash (BCH) Bitcoin Cash is a blockchain and cryptocurrency that forked from Bitcoin in 2017. It is maintained by several different groups of developers with the same overarching goal of maintaining an "upgraded" version of Bitcoin. Like Bitcoin, Bitcoin Cash uses SHA256 encryption in its hashing algorithm, has a limit of 21 million coins that will ever be released, and halves block rewards. However, its halving events are slightly shorter than Bitcoin's because of how the blockchain is designed. Bitcoin Cash's next halving event takes its block rewards down to 3.125 BCH from 6.25 BCH. Ethereum Classic (ETC) Ethereum Classic is a fork of Ethereum that uses a version of the blockchain that existed before the infamous The DAO hack. In 2016, the decentralized organization "The DAO" was hacked after raising funds, draining millions of ether from its wallets. The developers controversially changed the blockchain back so that all wallets had the appropriate amount of ether in them. Part of the community disagreed with this action and created a fork. This fork still uses the proof-of-work system along with block rewards. The blockchain also uses a continuously decreasing supply scheme, cutting the block rewards by 20% every 5 million blocks. The developers and community call this a fifthening. The last fifthening was executed on April 25, 2022, with the next scheduled to be sometime in May 2024. block rewards will be decreased from 2.56 ETC to 2.048 ETC. 14 Blockchains Without Block Rewards Not every blockchain distributes block rewards through PoW consensus mechanisms to miners. Other blockchains utilize alternative consensus mechanisms with their own version of network participants and rewards. The most common consensus mechanisms other than PoW are Proof-of-Stake (PoS) and Delegated Proof-of-Stake (dPoS). PoS and dPoS PoS and dPoS blockchains distribute staking rewards in the form of new cryptocurrency to participants that "stake" their cryptocurrency to be allowed to validate transactions and receive the accompanying fees. Ethereum was formerly a PoW blockchain but switched to PoS in September 2022. PoS validators earn staking rewards and the right to propose or vote on new blocks if they have locked up, or staked, a certain amount of cryptocurrency. Delegated proof-of-stake users delegate their tokens to others who run nodes, called delegates or witnesses. Delegates with the most delegated stakes are chosen to validate transactions, secure the network, and receive rewards for their work, which they can then share with their stakers. 15 Staking Rewards vs. Block Rewards While the term "staking rewards" is sometimes used interchangeably with block rewards, the concepts are different. While both incentivize users to participate in securing a blockchain network, they differ in origin, purpose, and distribution. The network itself creates block rewards as part of the incentive process. When a new block is added to the blockchain, a predetermined amount of new tokens is created and awarded to the miner who successfully validates it. These rewards incentivize miners to invest in computational resources, contribute to the network's security on an open basis, and are distributed directly to the miners who solve the cryptographic puzzle to create new blocks. Staking rewards are generated by the network fees users pay for transactions and other operations. Validators are usually randomly chosen by the network and receive the transaction fees. Future of Block Rewards As blockchain technology continues to develop, it remains to be seen whether we will see more blockchains that do not rely on block rewards to incentivize network participation. Zcash, for example, is exploring the possibility of changing its consensus mechanism from PoW to PoS. 16 However, PoW will likely continue to play an important role in the cryptocurrency ecosystem for many years to come until solutions are developed that are not influenced by market prices or returns. Alternative consensus mechanisms and incentive systems exist, but they are housed on blockchains that fail to attract much attention, at least in the way Bitcoin, Ethereum, and other more popular cryptocurrencies have. Concerns About Block Rewards There are several valid concerns associated with block rewards that have been debated in the context of PoW blockchains' tradeoffs compared to blockchains with other consensus mechanisms. Here are a few of the most significant issues with block rewards. Accessibility The high cost of hardware and electricity for mining has centralized the rewards toward large mining pools and corporations with access to significant resources. These well-funded parties are able to better afford expensive specialized hardware called ASICs, which are significantly more efficient at mining than general-purpose computers such as Graphics Processing Units (GPUs) and Central Processing Units (CPUs). ASICs cost thousands of dollars, making it difficult for individual miners to put up an upfront investment and compete to earn block rewards. Environment Blockchains that rely on block rewards can be inefficient and environmentally harmful, as they require a significant amount of energy to generate computing power and recycle electronic parts. Blockchains that do not rely on block rewards are more energy-efficient, as they do not require miners to compete with each other by expending energy to solve cryptographic problems. For example, a Bitcoin transaction consumes around 1,224 kWh of electricity, equivalent to the power consumption of an average U.S. household over 41.97 days. 17 Ethereum's energy consumption per transaction is estimated to be around 0.02 kWh, less than the energy used by a lightbulb for an hour. 18 Versatility Blockchains that do not rely on block rewards can cater to decentralized applications (dApps), smart contracts, and other use cases requiring high transaction throughput and low latency. Real-time transactions and large volumes of data, which are often impractical for block reward-driven systems, can be more efficiently handled. Blockchains with block rewards typically experience frequent congestion and slow transaction confirmation times due to the time-consuming mining process. 19 Examples of dApps include decentralized finance (DeFi), such as exchanges (DEXs) that facilitate cryptocurrency trading without relying on centralized intermediaries. Microtransactions that enable small, low-cost payments for services like micro-content and micro-tasks can be economically used, as can supply chain management that tracks the movement of goods and materials. What Is the Current Block Reward? Block rewards differ by blockchain depending on the way they are designed to incentivize participation. Some blockchains have fixed rewards, and others have rewards that decrease over time. How Often Do You Get Block Rewards? Block rewards are generally awarded based on how a blockchain is designed. For instance, Bitcoin hands out block rewards about every 10 minutes, while Litecoin awards them about every 2.5 minutes. What's the difference Between a Block Subsidy and Block Reward? The difference is due to how a blockchain is designed and what terminology is used. If the term used by the developers is "subsidy," it is generally the set amount of coins awarded to a miner, and the block reward is the subsidy plus any fees earned. The Bottom Line Block rewards are a fundamental aspect of many blockchain networks, serving as an incentive to participants who contribute to the network's security and operation by properly verifying and confirming transactions. The decision to offer or not offer block rewards depends on the specific design and goals of the blockchain network. The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our warranty and liability disclaimer for more info. As of the date this article was written, the author does not own cryptocurrency. Compete Risk Free with $100,000 in Virtual Cash Put your trading skills to the test with our FREE Stock Simulator. Compete with thousands of Investopedia traders and trade your way to the top! Submit trades in a virtual environment before you start risking your own money. Practice trading strategies so that when you're ready to enter the real market, you've had the practice you need. 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