We have already understood at this point that decentralized peer-to-peer networks have no single central authority who controls and oversees their operations. Because of this, peer-to-peer networks require a more proactive role among their participants who run the networks through their nodes (namely, the computers they use to run the networks).
In order to motivate the network participants to continue their operations, the blockchain offers a wide range of incentives. The most well-known among them is called a block reward, which incentivizes peer-to-peer network participants who can successfully create (or, borrowing a term from the extractive industry: “mine”) a new block comprising a record of transactions. We call these people “miners”.
Bitcoin founder Satoshi Nakamoto argues that block reward gives a reason for these miners to keep working for the network; you can easily see why the success of a blockchain depends heavily on these people.
Back to basics: what miners do in the peer-to-peer network
Before we go into details about how block rewards keep miners up and running in their “mining operations”, so to speak, let us do a quick refresher on how the decentralized peer-to-peer networks work, what miners exactly do in their operations and the essential role of miners in creating blockchains.
The peer-to-peer network’s operations rely heavily on the information and data stored there. As a quick refresher, the peer-to-peer network breaks down their record of information and data in small chunks.
These chunks come in ledgers which record all transactions which happen simultaneously inside the peer-to-peer network, forming a block. Different blocks containing different chunks of transaction records are interlinked, or chained together, which is why we call them blockchain.
Different people work actively together to form the blockchain and here, miners play a key role. Miners work by solving a mathematical operation which determines the validity and authenticity of blockchain transactions. By sorting out valid transactions from those which aren’t, these miners will automatically mine the block or the transaction ledger we are talking about.
Obviously, these miners expend energy, time and resources in their operations and the big boon they are expecting for performing these activities is none other than the block reward itself. Now, how does blockchain reward the miners who work for it? The next section will address the question.
The logic behind block reward
For each block the miners have successfully mined, the blockchain will send them a certain sum of cryptocurrency. You can easily see that under this mechanism, a miner can just mine as many blocks as possible in order to gain as much money as possible from the blockchain. Considering how the economy works, this can create a cryptocurrency bubble which, if burst, will hurt everyone in the system.
Fortunately, a mechanism to regulate blockchain inflation rate has already existed; it is called block halving, whereas the value of a block will decline whenever a certain amount of new blocks have been mined — kind of like how the law of diminishing return works in blockchain. For instance, whenever a total of new 210,000 bitcoins (BTC) are mined, the bitcoin value will decline, in a process which takes about four years to happen.
Currently, the amount of bitcoin reward has declined, at the same time when mining activities get more expensive owing to the computational powers along with electricity miners use when they are on an extractive exploration in the blockchain. This can probably motivate miners to switch to a new cryptocurrency or consider becoming a cryptocurrency trader instead for more lucrative returns. Yet, apparently, block reward is not the only kind of incentive that the blockchain offers to miners to sustain the blockchain operations…
Additional privileges for miners: transactional fees and voting rights
Fortunately, there is a different mining incentive which can offset its costs: transaction fees; a certain sum miners are entitled to for every transaction they make. Finally, another privilege for blockchain miners is: they get the right to vote on the changes which they wish to see in the way the blockchain operates. This will be a big incentive for miners, especially those who truly care about the network or whose lives will be most significantly impacted by the states of the network.
Nonetheless, despite its weaknesses, block reward remains an essential incentive for miners, math and tech whizzes who wish to put their skills to the test, developing a decentralized network along the way.