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Blockchain Incentives to Miners

  • Difficulty Level : Expert
  • Last Updated : 06 Aug, 2021

A Blockchain is basically a database containing all the important information about the transactions of cryptocurrency, which is very difficult to manipulate. It can be called a Digital Ledger that contains all the information which is decentralized and distributed all across the nodes in the blockchain.

Bitcoin is a digital cryptocurrency that uses peer-to-peer network technology for transactions across the computers in the blockchain.

Bitcoin Mining is the process of adding important transaction details of Bitcoin to the Blockchain, like sender address, hash value, etc. The Blockchain contains all the history of the transactions that have taken place in the past for record purposes and it is stored in such a manner that, it can’t be manipulated.

An Incentive is basically a reward given to a Blockchain Miner for speeding up the transactions and making correct decisions while processing the complete transaction securely.

How Bitcoin Mining Works

Bitcoin Mining works in the following ways:

  • Mining needs high computational power and resources to solve difficult mathematical algorithms in order to add the transaction records successfully to the Blockchain.
  • The process of discovering a new Bitcoin is simply called Mining and Miners tend to find new Bitcoins by solving difficult and complex algorithms.
  • Each Miner across the world uses the computational resources and power he has to process the transactions and add the records to the Blockchain. Bitcoin is designed by its creator to mine every new Bitcoin every 10 minutes.
  • Since all Bitcoin Miners contribute their computational power for processing the transactions, they get a reward in return. All those Miners who solve the complex algorithms are awarded in terms of Bitcoin digital currency.

Incentives of Bitcoin Mining

  • At a particular time, the miner has a large number of transactions that need to be processed.
  • Also, a sender can send only some necessary information about the transaction since the maximum block size is already predefined by the system. Hence, to make the work of Miner easier by sending only relevant information to make the entire process faster.
  • For incentivizing the Miner for his correct decisions during the transactions, the sender generally sends some incentives (rewards) in form of the cryptocurrency, in which the transaction takes place. It is generally a small percentage of the whole transaction that takes place.
  • For Example – For a $250 Bitcoin transaction, the sender may send the incentive to the Miner of about $15 in Bitcoin.
  • From the past years, the Blockchain Incentive to Miners has continuously declined as the Incentive is completely dependent on the transaction fees of the cryptocurrency. For the time, when the transaction volume of the Blockchains decline, then the transaction fees also declines, making it difficult to compensate the Miners for their work and their computational resources.

Block Rewards

  • A Block Reward is basically a reward given to a Bitcoin Miner for every Block for which he has solved the complex mathematical algorithm, and thus, the transaction records are added to the Blockchain.
  • Halving Process is associated with Bitcoin that the Block Reward just halves itself once every 2016 Blocks are mined, every 4 years.
  • Bitcoin every 4 years-
    • 2012- 25.00 BTC.
    • 2016- 12.50 BTC.
    • 2020-  6.25 BTC.

Incentive Pools

An Incentive Pool for Blockchain works in the following ways :

  • A group of Miners tends to form an Incentive Pool so that, they can create blocks together for validating transactions, and then share the Incentives among all the Miners with equality.
  • When a Pool Miner finds out the solution of the block header, he cannot mess with that transaction without removing the validation from it.

Finally, Incentives to Blockchain Miners act as a reward for them to carry out the transactions properly and to motivate them as well for future transactions. It is also good for the Miners as well as to maintain the Blockchain protocol within the decentralized system. But, Miners tend to maximize their profit by using imaginative methods to temper with the Blockchain Protocol system. So, in the future, there are a whole lot of ways for improvement in incentivizing the Miners.

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