Block reward is the origin of each and every cryptocurrency within a blockchain. In fact, it is the only way to generate them and make them part of the economic system that supports a blockchain.
PIn order for the blockchain to form an economic system it is important to create a block reward mechanism. In this way, with each generated block miners obtain an economic benefit from their activity of mining is.. The block reward is given by the coinbase transaction. This is in charge of introducing new cryptocurrencies in the entire cryptocurrency economic system.
This reward seeks to guarantee the following:
- Offer the necessary economic incentive for the miners to keep their work mining blocks and securing the network.
- It introduces new currencies to the economic system allowing its dynamisation and massification.
Hence the importance of block rewards to maintain and sustain the functioning of blockchain networks. But this simple task is not as simple as it sounds. The block reward must conform to a system that controls the uncontrolled generation of coins to avoid damaging inflation. In the midst of all this, there are several facets of vital importance.
For this reason, this article will be devoted to explaining in a simple way how block rewards are calculated in broad strokes and the importance and impact it has on cryptocurrencies.
How is the reward of a block calculated?
The reward of a block includes a series of elements or facets that must be taken into account for its calculation. Among those facets we can mention:
Know the total issuance of cryptocurrencies
Calculating a block reward happens by answering first, How many coins will be fully generated on the blockchain?. In the case of Bitcoin, all the coins will arrive about to 21 million BTC. It may not seem like a very large number, but the truth is that it is. If we take into account that the minimum amount of BTC that can be used has 8 decimal places, the possibility of use grows.
But they will surely ask, Why is it important to know the amount of cryptocurrencies to be issued to calculate the reward for each block? The answer is simple: if we want to make reward divisions, we have to know how much we are going to issue and how we are going to divide that issue.
Keep in mind that the goal of cryptocurrencies is to be a completely decentralized system. That not only in its management and control but also economically. It is useless to have a cryptocurrency whose coins are in the hands of a few people. That would make his existence lose meaning. Therefore, it is best to divide and expand the cryptocurrencies generated to the maximum. One way to achieve this is to divide the rewards seeking maximum expansion, trying to get more people to benefit from them. This mechanism seeks to spread its use and avoid that few people can control the ecosystem, avoiding centralization.
At this point, knowing how many coins the blockchain is going to issue is very important, since an object with limited existence is an object of great value. Now you can understand why a collector can pay so much money for objects of limited existence. And you can surely understand why Bitcoin reaches these levels of value.
Set a cryptocurrency generation time
The second important point to establish the value of a block reward is to know, How long will the total broadcast last?. At this point it is just as simple and we will take the example of Bitcoin. If we issue a block every 10 minutes and want to issue 21 million coins in less than 1 year, the reward per block must be very high (~ 400 BTC per block). However, that is very high inflation and counterproductive in any case. Remember that with a greater offer of cryptocurrencies, the value of it is reduced and in any case we want the opposite effect. The idea behind Bitcoin is to create a safe and valuable global payment system, for which inflation must be controlled.
That is why the time that the cryptocurrency issuance will last is taken into account. In the case of Bitcoin, its issuance will end in the year 2144, 135 years after mining began. In this way, the generation of new coins in BTC is controlled and directed to increase its value as part of the Law of supply and demand.
There are other cases, for example, in which the issuance of coins is infinite. Cases like Ethereum y Monero they are two very well known. But initially these systems also have, in principle, a temporarily controlled emission, which is then extended to infinity with smaller rewards.
The use of halving
This third step is closely related to the timing of the emission examined above. Again the case is simple to see. If we want to issue a limited number of coins while reducing inflation, then we must reduce the value of rewards over time. At that point the halving. This action halves the block reward every certain number of blocks.
At this point, the use of halving will indicate what initial value will have the reward and the subsequent ones. The former is generally quite high enough to inject a large quantity of coins. This seeks to quickly boost the cryptocurrency economy. Thereafter halving will divide the reward in half. This seeks to continue injecting new coins at a lower rate. An action that normally causes the cryptocurrency to appreciate.
Cryptocurrency economic programming
The grouping of the rest of the stages occurs here, and is that the calculation as such of the reward falls on the source code of the blockchain software. It is at this point, where everything comes together and the software indicates to all nodes. the actual value of the block reward at that exact moment. In the case of Bitcoin, the programming that calculates the value of the reward is divided into two parts:
- Coinbase transaction calculation. At this point the total emission, the emission time and the halving are taken into account. These three values are what tell developers how much the coinbase transaction will be worth. The result of that analysis will be written to the source code where nobody can easily change it. This is the most fundamental part of the block reward. In Bitcoin, the coinbase transaction started generating 50 BTC per block as a reward. The schedule also states that every 210.000 blocks (~ 4 years) there will be a halving to reduce the coinbase reward. Currently, the coinbase generates 12,5 BTC as a reward for each block and it will be reduced to 0 in the year 2144. By then Bitcoin will have evolved or it will be able to continue on its way using the commission collection as part of its incentive system. economic.
- Calculation of commissions. Commission calculation is the most complex part of block rewards. It is a means created to complement the initial block reward. In fact, the commission system may be the only thing that keeps Bitcoin alive after all of its coins are issued. Commissions are dynamically calculated taking into account the use of the network, the available mining power and the value of Bitcoin at that time.
Importance of a block reward
As we have mentioned before, the importance of the reward of a block is that of generating new coins. In fact, it is the only way there is to create new coins within a blockchain. Furthermore, its generation and control allows creating a decentralized economic system. One where miners invest money to add more computing power to mine bitcoins. With their monetary and technological investment, miners decentralize and secure the network to prevent attacks. And at the same time, they generate coins that others can use for their exchanges.
Author
