What is a block reward?
While the crypto industry has adopted plenty of concepts from traditional finance, it’s also created its fair share. One concept that’s emerged from the crypto industry is block rewards. Block rewards come from assets that can be mined. This primarily includes cryptocurrencies that use Proof-of-Work (PoW) consensus mechanism.
Bitcoin is a prime example of a cryptocurrency that can be mined. Despite its mining difficulty, it’s among the most popular minable assets. This guide aims to explore block rewards — specifically Bitcoin block rewards — and explain how it all works.
What Are Block Rewards, and What Are They Used For?
As the name suggests, block rewards are rewards that you earn from mining crypto blocks. However, one thing to note is that not every cryptocurrency can be mined. Only those that rely on the Proof of Work consensus mechanism provide mining opportunities.
In comparison, projects that use Proof-of-Stake (PoS) mechanisms, require their users to stake assets. In doing so, they secure the network and earn rewards in exchange. When it comes to mining rewards, they work differently.
Bitcoin Mining Explained
Bitcoin mining is not an overly complicated process, however it can be a bit confusing for beginners. To help you understand how it works, we should first note that Bitcoin has a predetermined maximum supply. This supply is 21 million coins, and it was set by Bitcoin’s creator, Satoshi Nakamoto. Nakamoto was the one who mined Bitcoin’s first block and earned the first batch of rewards from it. This first block, or the Genesis Block, was the very beginning of Bitcoin’s blockchain.
But what is mining and what does it mean to mine a block? The concept of mining was initially introduced by Nakamoto in order to promote decentralization. When it comes to centralized institutions, like banks, they are in charge of processing transactions. They have their own servers which provide computing power and banks use their own algorithm to process payments.
The crypto industry on the other hand, promotes decentralization, so there is no single entity that provides computing power. For example, when a transaction is made, certain community members provide their electrical and computing power to help complete the transaction. These resources are given to the network, which uses a mining algorithm.
What this means is that there is an algorithm in charge of processing payments. This consists of complex mathematical equations that the algorithm solves using resources given to it. Once the equation is solved, a block is created and the transactions get packed into it.
In exchange for contributing to the transaction-processing and block-making process, miners receive a small amount of Bitcoin. That amount is a Bitcoin block reward.
Bitcoin MiningDifficulty and Block Time
An important thing to note is that the Bitcoin network has something called mining difficulty. This is a metric that determines the difficulty of the equation that needs to be solved.
Satoshi Nakamoto wanted to incentivise the process of mining. So, he decided that each block should take 10 minutes to be created. In order to ensure a 10-minute block time, he introduced mining difficulty. This algorithm determines the equation's difficulty based on how much computing power is in use.
That way the equation becomes increasingly difficult as more computing power joins the network. If the amount of computing power drops, the mining difficulty would also drop. That way, each block should always take roughly 10 minutes to be solved. The network doesn’t instantly detect a change in computing power, so time per block differs. However, it is roughly 10 minutes per block on average.
At first, miners were able to mine bitcoin with regular CPUs. However, over time as more people joined, the mining difficulty became too great. Users had to switch to GPUs, but even these became obsolete. After a few short years, specialized mining hardware was created for mining Bitcoin. This mining hardware includes ASIC miners, which tend to be very costly. As a result, Bitcoin mining is now rarely done by individuals. Most people just join mining pools and receive a portion of the bitcoin block reward.
Does Bitcoin Block Reward Come From Transaction Fees?
Technically no, Bitcoin block rewards and transaction fees are not the same. Miners will indeed receive transaction fees, but they come in addition to block rewards. Block rewards themselves represent coins that were not in circulation prior to being mined. Transaction fees on the other end, are the funds paid by crypto users whenever they make a transaction. As such, these are entirely separate funds.
It is also worth noting that block rewards and mining fees aren’t necessarily awarded in the form of the crypto that is being mined. For example, some networks that allow users to launch other tokens have their native cryptocurrency. This native cryptocurrency is used for paying transaction fees, even when you are sending one of the other tokens.
Since Bitcoin’s network doesn’t feature other tokens, both mining rewards and transaction fees come in the form of BTC. However, that doesn’t make them the same.
How Much Is the Bitcoin Block Reward?
The rewards received from Bitcoin mining are not fixed and will actually continue to drop over time. During the early days of Bitcoin mining, the Bitcoin block reward was 50 BTC. However, as of 2023, the block reward is only 6.25 BTC. The reason for this is a network process called Bitcoin block halving.
How Does Bitcoin Halving Work and Why Does It Happen?
Bitcoin block halving is a process that Satoshi Nakamoto added to the Bitcoin network to ensure long-term mining profitability. If Bitcoin rewarded miners with 50 coins each time, the network would give out all coins in only a few years. Satoshi likely anticipated that Bitcoin adoption would be a process that would last for decades. To ensure the longevity of Bitcoin mining, Satoshi introduced Bitcoin halving as a mechanism that reduces the reward for mining as time goes on.
Nakamoto decided that the rewards should be cut in half after every 210,000 blocks. For example, the first time 210,000 blocks were mnes, the rewards dropped from 50 BTC to 25 BTC per block. When the next halving happened, the rewards dropped to 12.5 BTC per block and so on.
As the block time for BTC is roughly 10 minutes, analysts can predict when halvings are going to occur. On average, they happen every four years. The first one took place on November 28th, 2012, the second took place on July 9th, 2016 and the third halving was on May 11th, 2020. The next Bitcoin halving is expected to occur during the start of 2024 and it’s estimated that mining and halvings will continue until 2140. At that time, the last Bitcoin will be mined, and finally, all 21 million will be in circulation.
FAQs
How Long Does It Take To Get a Bitcoin Block Reward?
It takes roughly ten minutes on average to solve a Bitcoin block. Since block rewards are received upon solving the block, that is how long it takes to get them. However, the amount of time needed for it can change if the amount of computing power suddenly drops or surges.
What Is the Block Reward for Bitcoin Halving?
During each Bitcoin halving, the block rewards get cut in half. The halving takes place each time when Bitcoin completes 210,000 blocks. This happens roughly every four years.
What Is the Block Reward for Bitcoin?
Bitcoin block reward as of 2023 is 6.25 BTC per block. However, as time goes by, future halvings will continue to reduce it. Bitcoin is expected to mine all of its coins around 2140.
Who Pays the Bitcoin Block Reward?
Bitcoin block rewards are paid by the network itself. The coin’s creator, Satoshi Nakamoto, created 21 million coins, which is Bitcoin’s total supply. Miners have been receiving small portions of this figure ever since January 2009.
