What is a Block Reward? Here’s Everything You Need To know

What is a Block Reward?

The cryptocurrency awarded to miners when they successfully validate a new block is known as a “block reward.” The block reward consists of two parts: the block subsidy and transaction fees.

The block subsidy comprises newly minted coins and represents the majority of a block reward. The remaining portion is made up of the fees paid by the transactions recorded in the block.

Since the block reward is nearly made up of the block subsidy, it is highly frequent to hear individuals discuss the block subsidy while referring to the block reward. As a result, in popular usage, the phrase “block reward” does not account for the transaction fees.

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Why Do Block Rewards Exist?

In order to make sure that the blockchain network is safe and secure as well as processing transactions, the protocols need to incentivize the validators, also known as miners.

Since there’s no central authority to maintain bitcoin (BTC) and all other cryptocurrency networks, block rewards are the major financial incentive for anyone to participate in the network.

Block rewards also act as the exclusive issuance mechanism for circulating newly minted cryptocurrency. Each successful validator who discovers (miners) or proposes (stakers) new blocks receives these crypto coins. These incentives can be fixed, which means that the same number of tokens are awarded as block rewards every time, or they can be dynamic, which means that the amount of coins distributed as block rewards decreases with time.

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In the case of Bitcoin, the block subsidy began at 50 BTC and is halved every 210,000 blocks (approximately once every four years). This is known as Bitcoin halving. It means that the block reward granted to miners gradually decreases over time.

Bitcoin’s block rewards have already been halved three times since the protocol’s inception in 2009 and will continue to be halved until the 21 million limit is reached. Block subsidies for Bitcoin were halved to 25 BTC in 2012, 12.5 BTC in 2016, and 6.25 BTC in 2020.

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