Decentralized digital currencies use the Blockchain instead of trusting a third party such as a bank to verify transactions and maintain network security. In this blockchain, people are needed to participate as validators and builders of transaction blocks. In mining-proof networks such as Bitcoin, it is the miners’ job to secure the network with the power of their computer hardware. In stock-based networks such as Thezos, individuals participate in blockchain and security by allocating their currencies to the network. In order to encourage people to participate in the extraction and shareholding process, a reward is provided to them, which “Block Rewards” they say.
Block rewards in digital currencies prove work
Proof of mining in a digital currency network is a security mechanism aimed at preventing cyber attacks on the network. In this mechanism, anyone who wants to work as a miner in the network and earn money, must allocate the processing power of their hardware to the network and with that processing power, try to solve a mathematical equation. Thus, if someone wants to attack the Blockchain, he has to have more processing power than other miners, which due to the large number of miners, this will be very difficult and has no economic justification.
This mechanism has been used in the blockchain of some of the largest digital currencies. Bitcoin, Ethereum, Litecoin, Bitcoin Cash, Monroe and Dash are some of these digital currencies.
For example, the processing power of the Bitcoin network at the time of this update is more than 125 million th / s (TH / S). This means that if one wants to attack and manipulate the bitcoin blockchain, one has to provide at least 63 million processing power levels, which is almost impossible for one person in today’s world.
In the following, we will examine the concept of block rewards in the Bitcoin blockchain, but in most digital currencies a similar process is underway.
Block rewards in Bitcoin blockchain
The block reward in the bitcoin network is the amount of bitcoin that is generated by creating each block (every ten minutes) and is given to the miner. Currently, the reward for each block is 6.25 bitcoins, which is halved every four years (after the extraction of every 210,000 blocks) during an event called “Hawing”.
In a bitcoin network, very high computing power is required to validate and add blocks to the chain. The miner who provides the computing power of his hardware to the network must pay for this computing power. Thus, these costs must be covered to motivate miners. Blockchain Network to miners to cover these costs reward Gives.
Under the Bitcoin protocol, the first successful miner to build a valid block to connect to the Blockchaink is rewarded. This reward is in exchange for the considerable cost that Miner spends on block mining. Therefore, in addition to the transaction fee, which is relatively low, the miner receives new bitcoins in the form of rewards.
Block rewards have two advantages for the Bitcoin network. The first advantage is that it motivates miners to secure the network in exchange for rewards. The second advantage is that the reward process puts new bitcoins into the cycle over time, bringing all the bitcoins into the market cycle over several years.
In 2009, when Bitcoin was invented, Satoshi Nakamoto set up the network to generate a maximum of 21 million coins. This raises two issues. First, when all 21 million bitcoins are mined, no new bitcoins will be produced, or rather mined. Second, when the number of bitcoins reaches its maximum, the miners’ reward will be only the transaction fee.
In the early days of bitcoin, the reward for extracting each block was 50 new bitcoins. However, after every 210,000 blocks are mined, the block reward is halved during an event called Howing. It takes about four years to extract 210,000 blocks of bitcoin. This time remains almost constant by adjusting the extraction hardness rate.
In 2012, the block reward, or bitcoin production rate, in the form of the Hawing event, was reduced to 25 points. Then in 2016, the block reward was halved again to 12.5 points. A few months ago, on May 11, 2020, the third Hawing incident occurred; This amount was again halved to 6.25 points per block. After another 64 Hawing events, the block reward will eventually be zero.
To better understand the value of bitcoin, comparing it to the value of gold always works. The gradual decline in bitcoin production is designed to preserve the value and value of this digital currency; Just as scarcity is a characteristic of gold. If gold were not scarce and we could, for example, make it on a tree, it would never have its current value. If the number of bitcoins that could be produced was infinite, then bitcoin had no potential to maintain its long-term value.
Therefore, the extraction rate is adjusted to maintain the bitcoin’s scarcity feature to prevent the digital currency from depreciating. If Bitcoin or any other currency is only produced and marketed, it will no longer have much value. This makes bitcoin mining more competitive.
How to receive a block reward in the Bitcoin network can be described as follows: As soon as a request is made for a Bitcoin transaction in the wallet, the transaction is sent to the decentralized Bitcoin network. Miners then compete to confirm the transaction, add blocks, and receive rewards.
To earn block rewards, miners must place valid transactions in blocks of about 1 MB in size. Then they start competing with each other to find the answer to a mathematical equation. This answer can only be obtained by guessing numbers.
Ethereum, like Bitcoin, uses an incentive-driven model for extraction. If the Ethereum extractor succeeds in extracting, it will receive 2 ethers, all block gas and an additional reward, called the Uncle reward. The Ethereum model owes much to the Bitcoin design; However, Ethereum also has fundamental differences with the superior digital currency. Also, in the near future, with the full launch of Ethereum 2.0, the proof-of-work mechanism for Ethereum will be fully explored, and the stock-proof mechanism will be used in this digital currency, which you will learn more about in the following.
Permanent rewards with extraction pools
As mentioned above, the first miner to reach the answer to the block equation will receive the block bonus, which is now 6.25 points in Bitcoin. But today, with the expansion of bitcoin and other digital currencies, direct mining is not possible for more than 90% of miners. If you buy a bitcoin mining machine right now and connect directly to the network, you probably won’t be able to win the block bonus for thousands of years, as there are many competitors who have invested hundreds of millions of dollars in this sector.
For this reason, most miners connect to the mining pool to extract bitcoins and other digital currencies.
The extraction pool is a virtual place where miners share their processing power with each other and all work together to extract a block. Ultimately, everyone benefits as much as their processing power. In other words, the miners transfer their processing power to the mining pool, and the mining pool works on behalf of the other miners to receive the block reward. Providing miners with the opportunity to earn a permanent and permanent income is the main advantage of the extraction pool.
Block bonuses in digital currencies proving stocks
Despite all its advantages, the proof-of-work mechanism is not without its problems. One alternative to maintaining the security of Blockchain networks instead of mining is the mechanism Proof of stock Is.
The main idea of this mechanism is that participants can allocate their assets to the network instead of spending a lot of money on extraction equipment, and the network at random intervals allows one of the participants to validate the next block. Obviously, the more digital currency a person spends on the network, the greater the reward.
Attacking stock-based networks requires the attacker to own more than 50% of the units of a digital currency, which is difficult to provide due to the distribution of wealth as well as insufficient supply. Also, if it is impossible for someone to have such capital, by attacking the network, its value will fall sharply and the attacker will be the first to lose.
So in this mechanism, what determines a participant’s eligibility for block authentication is not the hash rate provided to the network. Rather, the validity of the validator is determined by the amount of coins that are shared.
Polkadot, Tzos, Cardano, Binance coin, Stellar and others are among the coins that use this mechanism. Ethereum, the largest tool in the digital currency market, is also on the verge of changing its protocol to a stock-proof mechanism.
The difference between rewards and fees in extracting digital currencies
Extraction rewards are not the only miners receiving from the network. In addition to rewarding the production of new blocks, extractors and validators also receive transaction verification fees from the parties to the transaction.
For example, if you transfer some bitcoins from an exchange to your wallet, you will find that the amount of bitcoins deposited in your wallet is less than the amount of bitcoins you withdraw from the exchange. The difference between the two numbers is the same transaction fee that miners receive. Unlike the fixed amount of reward for each bitcoin block, which is determined by the Bitcoin protocol, the amount of the fee depends on network congestion and the user’s need to expedite the transaction.
Digital currencies rely on miners and blockchain credentials in China instead of trusting centralized institutions such as banks to verify transactions and secure the network. There are rewards for encouraging people to participate in this process.
In many digital currencies, the person who succeeds in creating and verifying the block is rewarded with a block reward, which we call a block reward.
In blockchains that use a proof-of-consensus mechanism for security, the reward goes to miners who have given their network extraction processing power. This mechanism is implemented in Bitcoin.
Also, in blockchains that use a stock consensus mechanism to ensure security, the block reward goes to the credentials that the coins have placed in the stock network. This mechanism has been implemented in currencies such as Tzos, Cardano and Stellar.