The block reward is the incentive given to bitcoin miners for securing the blockchain and creating new blocks. It comprises newly minted bitcoin — the subsidy — and transaction fees.
The primary purpose of the block reward is to distribute new bitcoin into circulation in a decentralized and predictable manner. It also incentivizes miners to contribute their computational power to maintain and secure the network. This is crucial for the network’s integrity, security, and ongoing decentralization.
It’s important to note that the block subsidy is halved approximately every four years in a process known as “the halving.” This mechanism is built into the Bitcoin protocol to control the supply of new bitcoin entering circulation and to ensure that the total supply of bitcoin is capped at 21 million.
The Role of Block Reward in Cryptocurrency Mining
Block rewards play a crucial role in cryptocurrency mining as they incentivize miners to invest their computational power and resources into securing the Bitcoin network. Without block rewards, mining wouldn’t be economically viable and the network’s security could be compromised.
As the Bitcoin network grows and more miners join the ecosystem, the competition for block rewards becomes increasingly intense. Miners must constantly upgrade their hardware and optimize their operations to remain competitive and continue earning rewards. This competitive aspect of mining has led to the development of mining pools, where multiple miners combine their resources to smooth out their block reward earnings; instead of waiting for an uncertain period, a miner points its hashrate to a pool which distributes rewards in proportion to contributed hashrate.
The Evolution of Block Rewards
The Halving of Block Rewards
The halving event is a scheduled occurrence that reduces the block reward by half every 210,000 blocks (approximately every four years). This protocol feature ensures a fixed, predictable and diminishing issuance of new bitcoins. As each halving event unfolds, the pace at which new bitcoin enter circulation is intentionally slowed, a feature that underpins bitcoin’s deflationary nature. This is in contrast to the elasticity of precious metals, whose supply responds to price action. With more demand comes more production, and vice versa.
The Increasing Prominence of Fees
From the outset, the value of transaction fees was expected to surpass the value of the block subsidy as the subsidy continued to be reduced by half in subsequent halvings.
Seemingly, this transition was advanced in 2023-24 by the competition for block space driven by Bitcoin Ordinals and inscriptions. This trend is beneficial for miner profitability, as it compensates for the diminishing block rewards over time. Furthermore, this shift is catalyzing advancements in layer-2 solutions, driving innovation and enhancing the Bitcoin network’s efficiency and scalability.
Summary
The block reward is a fundamental aspect of the Bitcoin network, driving the process of mining and securing the blockchain. With each successful block mined, miners receive a predetermined amount of newly minted bitcoin (the block subsidy) as well as any fees attached to the transactions in the constructed block.
The block reward is reduced with each halving. This reduction in supply growth, combined with the anticipation of reduced block rewards, influences the market value via the supply made available every day.
