Block Reward: Definition, How They Provide Incentive, and Future
What Is a Block Reward?
A block reward refers to the 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, Monero, Zcash, and Dogecoin.
Blockchains With Block Rewards
Widely used blockchains that rely on cryptocurrency mining and block rewards include Bitcoin, Litecoin, Dash, Monero, Zcash, and Dogecoin. These blockchains have a Proof-of-Work (PoW) consensus mechanism and the parameters of their block algorithms as of December 2023 are discussed below. A consensus mechanism is a cryptographic set of rules that dictates how participants in a blockchain network can agree on the current state of the ledger.1
In PoW blockchains, miners compete to solve complex mathematical problems that help confirm the accuracy of transactions, and the first miner to solve the problem is rewarded with the right to add the next block to the blockchain. The miners use networks of computers to do this, and every time a new block is created it is verified by other competing miners. Then a new math problem is introduced and the miners start over.
These cryptographic puzzles are largely similar across PoW blockchains and emulate Bitcoin's mining processes, regardless of variations in their PoW algorithms. Miners for PoW blockchains will try to repeatedly hash a block header, or apply a cryptographic hash function to a block's metadata elements, to find hexadecimal numbers called a nonce and a hash value which will let them produce a new block.2
3
4
5
6
7
Block rewards can improve the liquidity conditions of a cryptocurrency. A block reward introduces and distributes new cryptocurrency tokens into circulation, facilitating its use in transactions on the market. However, increasing the available amount of tokens can inflate the supply, potentially weakening the cryptocurrency's purchasing power. To control the inflation rate and maintain its long-term value, some blockchains will constrain the total cryptocurrency supply and decrease the block reward over time.8
How the block reward is distributed depends on whether the miner is solo mining or pool mining. A solo miner who successfully finds a block will receive the entire block reward for themselves. When you participate in a mining pool, you contribute your hashing power, also called hash rate, to the collective pool, and the block reward is split among all participants in proportion to their contributed hashing power, if the pool successfully finds a block. The pool operator might also keep a small percentage of the reward as a fee for managing the pool.9
Not every miner who contributes to a blockchain network gets a block reward. Only the specific miner who solves the complex math problem and mines the block receives the full reward. Pool mining therefore significantly increases the probability of getting a block reward compared to solo mining. Cryptocurrency mining pools combine their computing power, creating a much larger hash rate compared to a single miner. The collective hash rate has a significantly higher chance of solving the complex mathematical problem, finding a block, and obtaining profitability from mining.9
Bitcoin (BTC)
The mining algorithm for Bitcoin is SHA-256, which stands for Secure Hash Algorithm 256. The algorithm is underpinned by a cryptographic hash function that 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.2
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 virtually impossible to manipulate any block without altering all subsequent blocks, enhancing security.2
To create a new block, Bitcoin miners need to find a nonce value, a hexadecimal number that when combined with the header data produces a hash value below or equal to a specific target value.10
The target hash value for each Bitcoin block determines the difficulty of mining and is adjusted every 2,016 blocks with the goal of maintaining a consistent block generation time of 10 minutes.11
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 23, 2024. As of August 2023, 19.4 million bitcoins were in existence, or more than 92% of the total supply of 21 million bitcoins.12
13
14
Bitcoin's block reward is scheduled to reach zero around May 2140, but mining will likely no longer be profitable long by then. 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.15
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.16
Due to the high costs of ASICs, resistance to ASICs makes a blockchain's mining more accessible to those with less financial resources who can only afford to buy cheap mining gear.17
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.18
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.18
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 has been 6.25 LTC per block as of Aug. 2, 2023, the date of Litecoin's last halving. The minimum Litecoin block reward is expected to be reached in the year 2142. New LTC cryptocurrency will continue to be mined until all litecoins are mined.19
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 every block.20
4
21
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.22
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.22
Dogecoin's supply increases by 5 billion DOGE each year, resulting in a decreasing annual inflation rate.23
Monero (XMR)
Monero, a privacy-focused cryptocurrency, employs CryptoNightR, a PoW algorithm designed to be resistant to ASIC miners, similar to Litecoin's and Dogecoin's Scrypt algorithms.24
The difficulty of mining a Monero block adjusts every block, similar to Dogecoin, but it is based on the average difficulty of the last 720 blocks.25
The Monero difficulty adjustment rate aims for the time to mine a block to remain around 2 minutes, similar to Litecoin.26
Monero's mining difficulty is constantly fluctuating and based on the network's overall hashrate and target block time.27
A higher hash rate triggers an increase in difficulty, and a lower hash rate decreases the difficulty. If the average block time deviates significantly from the target block time, the mining difficulty adjusts accordingly to maintain the desired rate of new token creation.28
Monero's block reward has been fixed at 0.6 XMR since a so-called tail emission schedule was implemented in May 2022. The tail emission means the reward will never reach zero and miners will never have to rely on solely transaction fees, incentivizing them to always secure the network and removing a hard cap on the total supply of XMR tokens.29
30
Zcash (ZEC)
Zcash, another privacy-focused cryptocurrency, utilizes the Equihash and Digishield PoW algorithms.31
21
Zcash's mining difficulty rate adjusts every block, similar to Dogecoin, and the block time is roughly 2.5 minutes irrespective of the number of miners, a similar timeframe to Litecoin and Monero.32
32
Zcash has a fixed supply of 21 million ZEC and a halving mechanism that cuts the block reward in half every four years until all tokens are mined, similar to Bitcoin. Zcash's block reward is 3.125 ZEC since its first halving on Nov. 18, 2020, and it will be halved again on Nov. 15, 2024.33
34
At one point, the Zcash block reward was also subject to a Zcash Founders Reward. Until the first Zcash halving, an additional 20% of each block reward was specifically allocated to the Zcash blockchain's founders and early contributors.35
Dash (DASH)
Dash, a cryptocurrency focused on speed, employs the X11 and Dark Gravity Wave PoW algorithms. The algorithm's block reward is designed to incentivize network participation, distribute new DASH tokens, and compensate for contributions to the network through a system involving masternodes and a treasury.36
Masternodes are specialized full nodes that provide essential services to the Dash network, including instant and private transactions, governance, and network stability.37
The Dash treasury, also referred to as a budgeting system, funds development initiatives, marketing efforts, and community projects that contribute to the growth and adoption of Dash.38
Dash masternodes and miners combined are allocated about 90% of Dash's block reward, with 45% to each group, and about 10% of the reward is allocated to the Dash treasury.39
40
Dash, similar to Monero, has an emission schedule that decreases the block reward by 7.14% roughly every 385 days.41
The Dash block reward is 3.34 DASH as of 2023.37
40
Dash's mining difficulty adjusts approximately every block, similar to the adjustment frequency of Monero and Dogecoin.42
The mining difficulty adjustment keeps the average Dash block time consistently at approximately 2.5 minutes regardless of the number of miners participating in the network, similar to Litecoin.43
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 blockchains distribute staking rewards in the form of new cryptocurrency to validators, often called stakers, while PoA blockchains distribute transaction fees to trusted validators.44
Ethereum was formerly a PoW blockchain but switched to PoS in September 2022.
PoS and dPoS 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. However, instead of running their own validator nodes, dPoS users stake and delegate their tokens to other users 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.45
While the term "staking rewards" is sometimes used interchangeably with block rewards, the concepts are not technically the same. While both incentivize users to participate in securing a blockchain network, they differ in origin, purpose, and distribution.
Block rewards are created by the network itself as part of the inflation 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 validated the block. Staking rewards are generated by the network fees paid by users for transactions and other operations. These fees are pooled and then distributed to validators who stake their tokens to participate in the network's consensus mechanism.
Block 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 puzzles to create new blocks. Users who stake cryptocurrency are instead voting for the validators they trust to run the network and indirectly receiving a fixed percentage range proportionally to the amount of tokens staked by each validator.
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 planning to change its consensus mechanism from PoW to PoS.46
However, PoW will likely continue to play an important role in the cryptocurrency ecosystem for many years to come until more convincing solutions are developed. There is reluctance to shift away from PoW blockchains, despite their criticisms, due to their proven resilience against centralization.
Alternative consensus mechanisms can be susceptible to centralization, where large stakeholders have a disproportionate influence on the network and the voting processes required to reach consensus on changes. PoW creates a relatively decentralized network, where anyone with the necessary resources can participate in the mining process, attracting a diverse and decentralized pool of participants.47
Decentralization is seen as a key feature of blockchain technology, as it prevents any single entity from controlling or tampering with the network. Creating an immutable and incorruptible record of transactions is vital for a blockchain to be trusted. A transaction ideally can't be altered in a functional blockchain.48
Below is a discussion of concerns associated with block rewards which have been debated in the context of PoW blockchains' tradeoffs compared to blockchains with other consensus mechanisms. PoW blockchains come with potential drawbacks related to their financial accessibility, energy consumption, and engineering versatility.
Accessibility
The high cost of hardware and electricity for mining has led to large mining pools and corporations with access to significant resources to dominate mining. 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.49
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 solve complex mathematical problems with specialized hardware.
For example, Bitcoin transaction consumes around 709.37 kWh of electricity, equivalent to the power consumption of an average U.S. household over 24.31 days.50
Ethereum's energy consumption per transaction is estimated to be around 0.02 kWh, comparable to the energy used by a lightbulb for an hour.51
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 to handle real-time transactions and large volumes of data, which are often impractical for block reward-driven systems. Blockchains with block rewards typically experience frequent congestion and slow transaction confirmation times due to the time-consuming mining process.52
Examples of dApps include decentralized finance (DeFi) such as exchanges (DEXs) that facilitate the trading of cryptocurrencies without relying on centralized intermediaries, microtransactions that enable small, low-cost payments for services like micro-content and micro-tasks, and supply chain management that tracks the movement of goods and materials.
How Can Proof-of-Work Blockchains Be Attacked?
PoW blockchains typically encounter attacks that want to sabotage their normal operations, take over their networks, and rewrite their history. 51% attacks attempt to gain majority control over the network's hashing power to double-spend coins and alter transaction data. Denial-of-service (DoS) attacks overwhelm the network with excessive traffic or requests, grinding service to a halt. Malware attacks infect miners' computers to manipulate blockchain data and gain unauthorized access to their mining capital. Eclipse attacks isolate and flood a miner's network with malicious nodes and redirects the connections to only malicious nodes.53
Which Blockchains Don't Have Block Rewards?
Many major blockchains have developed consensus mechanisms that don't require mining and distribute block rewards to verify transactions and secure their networks. Some blockchains have a PoS consensus mechanism, such as Ethereum (ETH), Cardano (ADA), Tezos (XTZ), and Solana (SOL).54
Some blockchains have a dPoS consensus mechanism, such as EOS (EOS), Tron (TRX), and Avalanche (AVAX).55
56
57
Other blockchains utilize network-specific consensus mechanisms, such as Ripple (XRP)'s XRP Ledger Consensus Protocol (LCP) and Stellar (XLM)'s Proof-of-Agreement model for its Stellar Consensus Protocol (SCP).58
59
What Is the Probability of Getting a Block Reward?
The probability of getting a block reward is very small and can be determined by calculating the miner's share of the network hashrate (individual hashrate divided by total network hashrate), the average time to find a block (difficulty target divided by total network hashrate), the probability per second (block reward divided by average block time), and the probability of getting a block reward (probability per second multiplied by the time spent mining). For example, let's say your hashrate on the Bitcoin blockchain is 100 Megahashes per second (MH/s) and the total network hashrate is 200 Petahashes per second (PH/s). At your share of the network hashrate of 0.00005%, and at Bitcoin's average block time of about 10 minutes and block reward of 6.25 BTC, your probability of getting a block reward after mining for 24 hours would be about 0.0000000007%.9
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.
Investing in Bitcoin and other Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in Bitcoin or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein.
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. Try our Stock Simulator today >>
