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Everything You Should Know About Blockchain Rewards Distribution

Everything You Should Know About Blockchain Rewards Distribution
by John Carlucci - April 22, 2022

A blockchain reward is a percentage of newly issued digital tokens given to a user who helps in the verification of transactions on a blockchain network.

Validators are the individuals who validate transactions. However, they can also be referred to as stakes or miners, depending on the blockchain's consensus system.

Let’s take a better look at this topic and cover some details you should know.

What Are Network Rewards And What Is Their Purpose

Miners validate transactions and record them in consecutive blocks on the ledger in traditional Proof of Work (PoW) blockchains (BTC, ETH). The miners compete against each other in this attempt by completing complicated mathematical puzzles. The miner that creates the winning block is rewarded with a fixed number of tokens in exchange for their efforts.

This fundamental economic premise gives an incentive to sustain the network's essential infrastructure. The inefficient effort put into fighting for mining blocks is one of the primary problems of PoW networks, resulting in relatively poor performance and massive amounts of energy lost.

The Algorand blockchain, for instance, like many other contemporary blockchain networks, uses the notion of Proof of Stake to address the inherent flaws of Proof of Work. Unlike PoW networks, which use miners to verify transactions, PoS networks use validators to verify transactions written to each block on the chain.

Algorand selects validators by a mechanism known as sortition, with a bias for validators with the greatest number of tokens (referred to as stake). Validators, like miners, are rewarded for their efforts, but unlike PoW, no resources are spent on redundant, competitive work.

Usually, Algorand rewards are a percentage yield on the amount of stake held by the validator. As a result, validators' economic incentives are directly tied to their stake as a motivation for supporting the network. The bigger your stake, the more interested you’re in contributing to the network's health, and the more rewards you earn.

Block Rewards And Their Purpose

To keep the network safe and functional, protocols give people who work on the network a reason to find more blocks. Because bitcoin (BTC) and other cryptocurrencies don't have a single person in charge, block rewards are the main reason people join the network.

Block rewards also serve as a way to put new currencies into circulation. Each validator who finds (miner) or proposes (staker) new blocks gets one of these.

Depending on how many coins are given out as block rewards, these rewards can be fixed or progressive:

  • If fixed, the same number of coins are given out each time. 
  • If they are progressive, the number of coins given out as block rewards gets smaller over time.

Every four years, or 210,000 blocks, Bitcoin undergoes a "halving." This means that the block reward granted to miners gradually decreases over time. Successful miners have been collecting 6.25 BTC for each block discovered, which takes about 10 minutes, since the latest halving in May 2020. 

Since the protocol's inception in 2009, block rewards have been halved three times and will continue to drop until the total number of coins in circulation hits the maximum supply of 21 million coins. After that, no more block rewards will be given out, and no more coins will be released into circulation.

Transaction fees vs. block rewards

Source

It's also worth noting that block rewards and transaction fees are not the same things. A bitcoin miner, for example, will earn both block rewards and any fees associated with the transactions included in the new block. These are two distinct things, and once every bitcoin has been mined, miners are expected to rely only on transaction fees to fund their business.

Finally, block rewards are not always paid out in the same tokens that are used to transact on the blockchain. This is exemplified by stablecoins. These protocols carefully manage token supply to maintain a stable exchange rate against fiat currency.

Is the future bright for blockchain rewards?

Satoshi, the creator of bitcoin, planned just 21 million bitcoins in total to limit inflation. This is why, after every 210,000 blocks, the size of bitcoin block rewards is halved.

Each block reward was worth 50 bitcoins when bitcoin was first launched in 2009. The block reward was reduced for the third time in May 2020, to 6.25 BTC. In May 2021, there were 18.7 million bitcoins in circulation, accounting for roughly 90% of the total intended supply.

Conclusion

Finally, block rewards aren’t necessarily valued in the same tokens that are used to transact on the blockchain.

These protocols carefully manage token supply in order to maintain a stable exchange rate against fiat currency. As a result, they frequently provide miners with a separate native token as a reward.

Author

  • John has worked alongside Real Estate Giants across USA and Canada for decades. Since he started Prudentialcal, he has been actively rendering service as business adviser to many companies in the real estate industry. He formed Prudentialcal in hopes of providing the most reliable stories and information there is in the vast industry of real estate

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