TheBlock Reward is a fundamental concept in the cryptocurrency world, representing the financial incentive that participants in a blockchain network (miners or validators) receive for successfully adding a new “block” of transactions to the blockchain.
How does the block reward work?
Exactly how the block reward is awarded depends on the consensus mechanism of the blockchain in question. The most common mechanisms are Proof of Work (PoW) and Proof of Stake (PoS):
In the case of Proof of Work (PoW) – e.g. Bitcoin (before halving in 2024, 6.25 BTC/block)
- Miners compete to solve complex cryptographic puzzles, a process that requires significant computing power (and, by implication, electricity).
- The first miner to find the valid solution has the right to add the new transaction block to the blockchain.
- As a reward, this miner receives a pre-determined amount of newly created cryptocurrency (e.g., newly issued Bitcoin) and, in addition, the transaction fees associated with the transactions included in that block.
In the case of Proof of Stake (PoS) – e.g. Ethereum (after“The Merge“)
- Validators are selected to create and validate new blocks not on the basis of computational power, but on the amount of cryptocurrency they “stake”. The higher the stake, the higher the chances of being chosen.
- When a validator is selected and successfully adds a valid block, they also receive a reward, which can include new coins and/or transaction fees.
Why is the block reward important?
The block reward is crucial for several reasons:
- It boosts network security: Provides a strong financial incentive for miners or validators to invest resources (hardware, energy, capital) and act honestly, contributing to the security and integrity of the blockchain.
- Introduces new coins into circulation: In many blockchains, part of the block reward is new coins issued.
- Helps keep the network decentralized: Participants are rewarded and the blockchain can operate decentralized.
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