Cryptocurrency is in their realm to enter the mainstream, with many new investors entering the crypto market daily. Apart from the unique functionalities offered by the platform, earning a passive income from staking and mining cryptocurrencies is a major reason for increasing crypto traction. A Block Reward is used to serve the purpose.
Table of Content
- What are Block Rewards?
- Advantages of Block Rewards
- Why Block Rewards are Introduced?
- How do Block Rewards Work?
- Factors Considered for Determining Block Rewards.
- Limitations of Block Rewards.
Block Reward
Block Rewards are incentives awarded to crypto miners for validating new blocks and adding new transactions to a blockchain. A portion of the transaction fee or cryptocurrency token is given as a reward. The process of mining involves computational power and other resources. These rewards act as compensation for utilizing these resources.
The block reward is made of two components: newly generated coins and transaction fees. The newly minted coins hold the major portion of the block reward and the remaining portion is made up of the transaction fees.
Block Reward Advantages
Block rewards offer numerous benefits to operators and miners.
1. Ensure Security
Being a decentralized network, there is no central authority to ensure the security of the blockchain. Block rewards enable the miners to enhance security in the mining work.
2. Token of Compensation
Mining involves solving cryptography problems, which involves challenges. When miners are provided with block rewards it increases their interest in mining more coins.
3. Increases Investment
Block reward increases the number of investors in the platform. Hoping to get rewards many people invest in the crypto platform, increasing the engagement within the platform, contributing to the massification of the blockchain network.
4. Increases Participation
The token rewards increase the engagement of investors utilizing the platform. These are also considered a loyalty reward for investors within the blockchain.
Why Block Reward are Introduced?
Block Rewards are provided as compensation or incentives to miners for validating and transacting new coins. Since blockchains are decentralized platforms, there is no central authority to ensure security and validate transactions.
The reward protocol incentivizes the validators to ensure security in the network. The incentives received are used to ensure the security of the network.
A block reward increases the participation of miners in the network. It also acts as an issuance mechanism for validating the circulation of newly minted coins. Whenever a new coin is minted, a reward is given in the form of cryptocurrency, this increases the circulation of new coins.
How do Block Reward Work?
The blockchain that provides block rewards includes Bitcoin, Litecoin, Ethereum, etc. These blockchains generally utilize Proof of Work consensus (PoW). Blockchain that works using proof of work consensus, validates the transaction using full and partial nodes.
The transactions are placed in a queue after verification. The mining node picks the transaction and proceeds mining. Miners have to solve cryptographic problems to add the new block to the blockchain. The miner who first solves the problem receives the block reward.
The amount of reward depends on the blockchain in which the mining took place. Generally, it includes a certain number of cryptocurrency and transaction fees. Since the transaction fees are low, they are not discussed often.
Factors Considered for Determining Block Reward
Block Rewards are determined by considering factors such as circulation rate, generation time, and transaction fees of the mined crypto.
1. Circulating Rate
Since rewards are given in the form of crypto tokens their rate of circulation matters. The circulation rate must be large enough such that the coin does not lose its value.
2. Generation Time
The generation time is the time taken for broadcast. The higher the broadcasting time, the lower the value of the crypto assets.
3. Transaction Fees
Transaction fees vary depending on the congestion in the network. The higher the congestion, the higher the transaction fees.
Block Reward Limitations
Though blockchain rewards increase the circulation of coins, they come with many limitations.
1. Centralization of Reward
The high cost of mining has centralized the block rewards to large mining pools. These parties conduct mining using advanced technologies preventing individual miners who utilize general-purpose computers from earning token rewards.
2. Inefficient Blockchains
Blockchains that provide block rewards are inefficient and cause harm to the environment since they utilize large amounts of energy for generating computing power compared to the blockchains that don’t offer block rewards.
3. Congestion and Slow Transaction
Blockchains that rely on block rewards face the issue of congestion in the network while processing transactions. The increase in congestion reduces the speed of transactions and thereby increases the transaction fees.
4. Increased Cost
Mining of blockchain requires high-power computers and consumes large amounts of energy. The block rewards obtained can be less than the cost of devices and energy, thus creating a loss rather than a profit.
Final Thoughts
Block rewards act as compensation for miners who use large computational power and energy for mining. These rewards increase the number of circulating coins and ensure security in mining.
However, the rewards sometimes are less than the bills of energy and devices, making many back off from the mining process. As blockchain technology expands, more blockchain platform tends to operate without relying on blockchain rewards to increase network participation.