Explaining the Bitcoin Block Reward
the bitcoin block reward is a fundamental part of the bitcoin network. it is a central piece of the incentive structure that ensures bitcoin miners continue to validate and secure the blockchain.
Below is a summary of how it works, starting with a brief definition of the bitcoin block reward, followed by a look at the process itself. Finally, we will delve into the possible outcomes of the reward system.
Reading: Bitcoin block reward
how are block rewards created?
first you need a bitcoin wallet
To start a transaction, all you need is the public key address of the intended recipient. a public key would, of course, be combined with a private key, which in essence is proof of ownership that an entity does, in fact, own and have the right to spend the coins it has.
The repository that stores bitcoin is a piece of software known as a wallet. Wallets can come in various forms, but for the purposes of this article, there are three main types: hard wallets, soft wallets, and paper wallets. all wallets have one thing in common, they have a public and private key and keep track of your bitcoin.
A public key is very similar to your bank account number. it’s just a set of numbers and letters that are formatted specifically to identify itself as a bitcoin wallet address. a private key is similar to a vault combination. There is only one password that opens the vault, and if you lose it, there is virtually no feasible way to get in to retrieve its contents.
Initiate a bitcoin transaction and the network signature validation process
When the transaction is initiated, the details are transmitted to a decentralized network of computers around the world. these specialized computers are known as nodes. A node is simply a computer that is connected to a network of other computers on the Internet for the purpose of transmitting information to each other. Since all nodes transmit almost identical information at the same time, they allow the network to be decentralized.
one of the most important components of the bitcoin network is the fact that the nodes must reach a unanimous consensus to validate the information.
Transaction details include the bitcoin wallet address from which the sender will debit, the receiver’s public key (wallet address), and the amount the sender wishes to send. That information is transmitted to the bitcoin network where a node verifies that the sender does, in fact, own the bitcoin they wish to send and that the intended recipient’s wallet address is in the correct format.
The authentication process ensures that the originating wallet has custody of all of that wallet’s transaction history, and thus can flag any instances that suggest a wallet is attempting to send bitcoins it doesn’t actually have.
what role do nodes play in the security of the bitcoin blockchain network?
Nodes, in essence, provide public oversight and reporting, much like third-party financial institutions in our current traditional financial system. the only difference is that the nodes are decentralized and practically impossible to shut down, since each node is independent from the others. a dramatic example of this resiliency occurred in 2021 when a significant part of the network went offline.
The node that collects the transaction is usually a ‘light node’, which only serves to validate the signature and authenticity of a transaction. once authenticated, it is transmitted to a full node, which carries the full history of the blockchain’s ledger. the transaction data is then moved to that full node’s mempool, where it waits until a specialized node called a mining node assembles it into a candidate block.
At this point, the transaction between two parties has been transmitted on the network, it has not yet been validated. Until now, neither party has benefited from the security and supervision provided by a mining node. Without the guarantee and validation of settlement provided by the proof-of-work algorithm solution, a transaction cannot be settled. it is for this confirmed financial settlement guarantee that miners receive a block reward.
Dive deeper: bitcoin miners & mining nodes
transactions that are moved to a mempool are still in a “pending” state and remain uncommitted. A mining node, also known as a bitcoin miner, will examine all the transactions, sort them by transaction fee, and assemble them into what is known as a candidate block. a candidate block is a block that has yet to be validated and added to the blockchain.
Bitcoin miners from around the world compete to validate their candidate block before the other mining nodes in the system. validating a block requires the computer to solve a series of complex puzzles and ultimately generate a unique code called a hash. the first miner to transmit their valid hash has their candidate block added to the blockchain itself. The incentive to validate a miner candidate block as quickly as possible is to earn a bitcoin block reward.
When a mining node identifies the correct hash, ultimately validating a block of transactions, it is transmitted back to the blockchain network, which immediately verifies that the miner followed the bitcoin core protocol. this process is transparent and immutable thanks to distributed ledger technology (dlt). the dlt is managed by thousands of participants (nodes) who verify that the blockchain is accurate and that the miners who organized the blocks correctly executed the bitcoin core protocol.
bitcoin protocol: transaction fee & difficulty settings
how game theory and cryptoeconomics support the block reward
For the purposes of this article, we will simply describe game theory as a mathematical model of human behavior within a dynamic environment. the participants in the game will strive to find a path that leads to the best possible result in each instance of the game.
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In the case of the bitcoin blockchain network, the players in the game are bitcoin miners. Approximately every 10 minutes, the game starts anew when a winner receives the block reward for successfully validating their candidate block and adding it to the blockchain.
each candidate block in the bitcoin blockchain can only contain 1mb of data. this limits the number of transactions miners can include per block, creating a sense of competition among users and an incentive to assemble a candidate block that will yield the highest monetary reward. the total sum of the reward for validating a block is a transaction fee from the initiator of the transaction and the block reward provided by the protocol.
dynamics that affect limitation & blockchain network validation speed
There are certain protocols that cause the network to slow down, forcing users to increase their transaction fees to speed up the processing time of their transactions. The following will explain what they are and how they affect the economics of the bitcoin block reward and the sustainability of the bitcoin blockchain network.
network congestion due to high volume
The memory limit on block size creates a natural bottleneck in transaction processing speed. The bitcoin protocol allows the initiator of a transaction to adjust the fee they are willing to pay to increase the probability that their transaction will be added in the next block to be validated. In other words, there is a built-in market-based system that determines the maximum duration needed to process a transaction.
Transaction fee dynamics play an important role in incentivizing miners to support the blockchain’s expensive proof-of-work validation system. miners are incentivized to fill their block with transactions that will generate the highest aggregate reward (block reward + transaction fee) for their efforts.
changes in the average time to validate a new block
Bitcoin’s core protocol was written to allow an average block to be validated every 10 minutes. Variations in the aggregate hashrate of the live network can have a significant effect on network performance and bitcoin price economics over time. The protocol has another built-in mechanism that adjusts the difficulty of solving the puzzle bitcoin miners must solve to manage the average time it takes to validate a new block on the blockchain. if left unchecked, the sustainability and reliability of the bitcoin network would be at risk and would eventually collapse.
the mechanics of the bitcoin network difficulty and the sustainability of the block reward
mining difficulty is automatically adjusted every 2016 blocks. the protocol calculates the adjustment to the difficulty of solving a hash by taking the average time it took to validate the 2016 blocks in that period. the goal over time is to maintain an average duration to validate a block of approximately 10 minutes.
destabilizing effects on the crypto economy
If the difficulty setting were not present, the system would deteriorate as the economic principles of supply and demand take over. transaction fees decrease as more miners enter the system in an effort to earn a block reward. the rate of newly minted coins would rise exponentially, leading to an imbalance between supply and demand in the coin market. the value per coin would fall until a balance between the cost of mining a new coin satisfies the demand of investors to buy the new supply of bitcoin.
It is easy to see that, without the periodic difficulty adjustment, the value of the block reward would collapse. Eventually bitcoin miners would have little to no incentive to continue validating the bitcoin blockchain network.
mechanics & sensitivity of network hash rate change to difficulty settings
The difference between the live network hashrate and the network hashrate used for difficulty adjustment is transparent and can be easily calculated using the average discussed in the previous section.
Positive network difficulty adjustments would suggest an imbalance where there was a net increase in the average network hash rate. a lower network hash rate is representative of more bitcoin miners entering the network or less demand for transaction validation. this would lead to a lower average transaction fee per block and a decrease in the time it takes to validate a block.
Users benefit from lower costs and network throughput speed at the expense of miners’ incentive to continue with the higher difficulty of earning a block reward.
Negative network difficulty adjustments would suggest an imbalance where there was a net decrease in the average network hash rate. a lower network hash rate is representative of fewer bitcoin miners entering (or existing miners disconnecting) from the network than the demand for transactions to be validated. this would lead to a higher average transaction fee per block and an increase in the time it takes to validate a block.
Increases in costs and slower network performance come at the expense of users, while remaining miners in the network benefit by spending fewer resources to earn a block reward.
lower cost users and network throughput speed at the expense of miners’ incentive to continue to keep up with the higher difficulty of earning a block reward.
what happens when the bitcoin block reward runs out?
no new bitcoins will be added to the total number of existing bitcoins. once the total global supply has reached approximately 21 million, the show will be over to earn bitcoins with a block reward.
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However, bitcoin transactions will still be pooled, blocks will be processed on the blockchain, and bitcoin miners will still be compensated at market value for each transaction fee. the question really is, will the transaction fees be enough to justify the cost of solving a proof-of-work algorithm that is needed to validate a new block?
effects on the cryptoeconomics of mining bitcoin without a block reward
The last bitcoin is expected to be mined in the year 2140. There will be a fundamental transition in the incentive structure for bitcoin mining. If the bitcoin network continues to support bitcoin miners validating transactions, the miners will continue to earn transaction fees. however, the cost per transaction for users and the reward for miners for validating blocks will play a critical role in determining the sustainability of the bitcoin network.
the evolution of the bitcoin mining industry
The end of the bitcoin block reward as we know it today is not a prediction, it is a certainty. Having 100+ years to prepare for the end of your main source of income is plenty of time to invest in technologies that can even support blockchain network adoption, increasing the value of each transaction and justifying higher transaction fees for users. miners.
Innovation and adoption in the use of blockchain technology will support the economics of bitcoin mining and possibly help keep the network going forever.
predictions for bitcoin in the year 2140 without block reward
Disclaimer: We are now entering the realm of science fiction. Anyone who claims to know the future of bitcoin is certainly telling a story.
There are some interesting science-based possibilities. we can extrapolate some trends that we are seeing today. Let’s briefly explore some of those possibilities and end this article with a sense of hope for the future and possibilities of bitcoin.
the value of a bitcoin
From the start, no one will know the value of bitcoin in 2140 let alone next month or next year. anyone who has ever tried it has failed miserably. therefore, the best we can do is assume that if bitcoin succeeds as a store of value, the economics of supply and demand will suggest exponential growth in the value of each coin.
If bitcoin fails to meet its intended potential or is outperformed by a superior cryptocurrency, it will most likely be used in niche use cases and the value will largely be dictated by the value provided to the end user in those transactions. .
bitcoin blockchain network
Current trends in the evolution and use cases of the bitcoin blockchain network are very exciting and evolving at the speed of light. future web applications are 100% science fiction. however, we can assume that there will be effects on the democratization and decentralization of the traditional financial system that provides access to unbanked and unbanked populations of the world. The speed, security, transparency, and efficiency of value transfer around the world would be improved compared to the current fiat-based system. Entrepreneurs will most likely innovate by creating layers that live on top of the bitcoin blockchain, exponentially increasing bitcoin’s utility around the world.
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At this point, we hope you have developed a deeper understanding of the bitcoin block reward and the implications of its role in the blockchain network. we have helped define what a block reward is, the mechanics of how it is rewarded, and its role in the incentive structure that balances the entire network. yes, there will come a time in the distant future when the block reward will disappear. however, lest we forget, bitcoin is barely a decade old as of this writing and look how far we’ve come. there is much more to discover as pioneers and industry titans begin to awaken to the true potential of bitcoin.
abdulrahman hamdy is the technical systems administrator for argo blockchain. he has a b.sc. in Computer Science with a specialization in Artificial Intelligence from the University of Manitoba. michael bogosian is a bitcoin & Blockchain analyst who has an MBA from Loyola University Quinlan School of Business in Chicago. he has been researching and writing about bitcoin & blockchain technology since 2018.
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