Blockchain

Understanding its role in blockchain

Published

7 months ago

7 May, 2024

Block rewards play a critical role in the tokenomics of a cryptocurrency. Read on to find out what a block reward is and what role it plays in managing blockchain protocols.

The explanation of the block reward is quite simple. It is a form of incentive given to network participants called miners or validators to verify and add new transactions to a blockchain.

Miners are responsible for discovering new blocks in the blockchain, and these rewards serve as a way to encourage them to participate in the network and protect it.

Network participants who verify transactions in Proof of Work (PoW) networks, such as Bitcoin (Bitcoin), are known as miners. In test of the bet (PoS), they are called validators or stakers.

In the Bitcoin ecosystem, the block reward incentivizes miners to direct computing power towards securing the Bitcoin network. This reward reduces by half every four years or every 210,000 blocks in what is known as Bitcoin halving. Miners also receive transaction fees as part of the reward for ensuring the integrity of the Bitcoin network.

The reduction in block rewards is part of Bitcoin’s mechanism to slow the introduction of new coins into the circulating supply, which helps fuel the cryptocurrency’s deflationary monetary policy.

Types of block rewards

To better understand what a block reward is, you should know that it is mainly composed of two components: the block subsidy and the transaction fees. Block grants are new tokens introduced into the blockchain and given to miners for their work in discovering new blocks, confirming transactions, and securing the blockchain. Transaction fees, on the other hand, are money paid by users of a blockchain network to validate their transactions.

Each cryptocurrency has its own validation process and reward system. Bitcoin, for example, as stated earlier, uses the proof-of-work system for its block rewards. It is the original consensus mechanism used by cryptocurrencies, including Ethereum (ET), in its early days.

Here, miners compete to solve complex mathematical puzzles to validate transactions and create new blocks. The miner who solves the puzzle first receives the block reward, consisting of newly minted coins and transaction fees.

In other consensus mechanisms, such as proof of stake, validators propose and validate blocks based on the number of tokens they hold and are willing to provide as collateral. They then receive rewards in the form of additional tokens, which are usually the native cryptocurrency of the blockchain they are on.

The more tokens a validator stakes, the higher his or her chances of being chosen to create a block, and unlike PoW, PoS networks often have a fixed annual percentage reward for validators.

The combination of mining rewards and transaction fees creates a strong incentive structure for miners, promoting network security, decentralization and transaction validation.

Together, these elements provide the economic framework that keeps cryptocurrencies decentralized and in line with miners’ incentives for the overall well-being and functioning of the blockchain.

How block rewards work

Block rewards work differently depending on the consensus mechanism of a blockchain network. A consensus mechanism is a fundamental protocol used in blockchain systems to achieve agreement, trust, and security across a decentralized computer network.

There are several consensus mechanisms in use in the blockchain space, but the two best known are the aforementioned PoW and PoS, whose participants are known as miners and validators.

How Do PoW Miners Earn Block Rewards?

When proof-of-work miners, like those on the Bitcoin network, confirm transactions, they are grouped into blocks and a new block is added to the previous set of blocks on the blockchain.

There are currently 19,695 million Bitcoins in circulation out of the 21 million that will exist at some point. This means there are less than 1.3 million Bitcoins yet to be mined.

The process of acquiring block reward in PoW networks begins when miners collect pending transactions. They then perform computationally intensive calculations known as hashing to find a specific value or nonce that, when combined with the block’s data, produces a hash with particular properties, such as a certain number of leading zeros.

The first miner to find a valid nonce that meets the difficulty criteria broadcasts the new block to the network. When other network participants approve the integrity of the nonce, the successful miner receives a block reward consisting of newly minted coins specific to that blockchain.

For example, Bitcoin miners get their rewards in the form of BTC, while Litecoin (LTC) miners receive block rewards in the form of LTC.

Additionally, miners collect any transaction fees users pay for including their transactions in the block. The total reward, which consists of a block subsidy and transaction fees, is then credited to the miner’s wallet.

The block reward amount is calculated based on preset formulas that consider various factors such as network activity, mining difficulty, and consensus mechanism.

When networks receive high amounts of transactions, participants earn higher rewards. Likewise, if extraction becomes more challenging, the reward may increase.

The block reward in the blockchain varies, as each network has its own reward structures. Some blockchains have fixed rewards, meaning the same number of tokens are awarded as a block reward each time, while others gradually decrease the reward over time.

For example, Bitcoin undergoes a halving approximately every four years, and each halving reduces the block reward given to miners. The latest halving event occurred on April 19, 2024 and reduced the amount of BTC successfully received by Bitcoin miners to 3,125 BTC for each block discovered.

When the last BTC is mined by 2140, it will signal the last block of Bitcoin reward that each miner will receive, and from there on, miners will only earn transaction fees because new Bitcoin can no longer be mined.

For now, however, Bitcoin miners will continue to earn the block reward determined by the halving plus transaction fees accrued by people using the network.

The role of block rewards in Bitcoin tokenomics

A Bitcoin block reward is important because it serves as an incentive for miners to secure the network. Each new transaction confirmation adds to the longer transaction chain. As a result, this ensures that miners only maintain the correct chain of blocks in the network.

Additionally, block rewards control the issuance of new currencies. The block reward system, by determining how new coins circulate, plays an essential role in the monetary policy of the Bitcoin protocol, creating deflationary pressure by slowing the rate at which new coins enter circulation.

The regular reduction of the Bitcoin block reward is one of the ingenious features of Bitcoin, which has helped it increase in value over the years as the growing demand has been met not only with a fixed coin supply but also with a slowdown of new coins. entering circulation. This has resulted in upward pressure on prices.

How do validators earn bulk rewards in PoS networks?

In a PoS network, validators stake the network’s native token to take part in the blockchain’s consensus protocol to verify and process transactions.

Validators are then randomly selected to propose and validate new blocks based on the number of tokens they hold in the network. The more tokens a validator stakes, the higher its chances of being selected to create a block.

Additionally, the amount paid to validators depends on the percentage of the total staked amount of coins they hold. The more coins they stake, the higher their share of the block prizes paid.

The block reward depends on the specific blockchain, as different PoS chains pay different block rewards.

Validators are typically chosen deterministically or pseudo-randomly to ensure a certain level of fairness. When their turn comes, they propose a new block containing a batch of transactions. Other validators then verify the proposed block to ensure its correctness, and if the block is valid, it is added to the blockchain.

Validators then receive block rewards for their participation, usually consisting of additional native PoS blockchain tokens minted specifically for this purpose.

It should be noted that most networks have some form of sanctions in place to protect themselves from validators acting maliciously. If they act dishonestly, for example, by engaging in double signatures, censorship, or other violations, a significant portion of the staked tokens could be lost in what is known as slashing.

Another point to note is that validators can manage their own nodes or allow others to delegate tokens to them. Delegators entrust their tokens to validators, who then share the rewards with them.

The system is popular because delegated tokens often contribute to the validator’s total stake and increase his chances of being selected to propose a new block. It also allows those who do not hold significant amounts of tokens to still earn block rewards.

Final thoughts

Hopefully, the meaning of block reward is now clearer to you and you can see the vital role it plays in the cryptocurrency economy, especially in systems like Bitcoin, where miners or validators play a crucial role.

These rewards not only incentivize participants to secure the network, but also control the introduction of new coins, shaping overall monetary policy.

The mechanisms vary between Proof of Work and Proof of Stake networks, but they share the goal of maintaining the integrity of the network while rewarding participants for their contributions.

This dynamic interplay between rewards, consensus mechanisms and network security forms the backbone of cryptocurrency ecosystems, ensuring their continued functioning and growth.

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Blockchain

Bitcoin (BTC) Price Crashes as Donald Trump’s Win Odds Dip

Published

4 months ago

1 August, 2024

BlockChainBulletin Staff

Markets received nominally good news on Thursday morning, with the US ISM manufacturing PMI for July falling much more than economists expected, sending interest rates to multi-month lows across the board. Additionally, initial jobless claims in the US jumped to their highest level in about a year. Taken together, the data adds to the sentiment that the US is on the verge of a cycle of monetary easing by the Federal Reserve, which is typically seen as bullish for risk assets, including bitcoin.

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Blockchain

Terra Blockchain Reboots After Reentry Attack Leads to $4M Exploit

Published

4 months ago

1 August, 2024

BlockChainBulletin Staff

Terra Blockchain Reboots After Reentry Attack Leads to $4M Exploit

Please note that our Privacy Policy, terms of use, cookiesAND do not sell my personal information has been updated.

CoinDesk is a awarded press agency that deals with the cryptocurrency sector. Its journalists respect a rigorous set of editorial policiesIn November 2023, CoinDesk has been acquired from the Bullish group, owner of Bullisha regulated digital asset exchange. Bullish Group is majority owned by Block.one; both companies have interests in a variety of blockchain and digital asset businesses and significant digital asset holdings, including bitcoin. CoinDesk operates as an independent subsidiary with an editorial board to protect journalistic independence. CoinDesk employees, including journalists, are eligible to receive options in the Bullish group as part of their compensation.

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Blockchain

$6.8M Stolen, ASTRO Collapses 60%

Published

4 months ago

1 August, 2024

BlockChainBulletin Staff

In the latest news in the blockchain industry, there has been a turn of events that has severely affected Terra and its users and investors, with the company losing $6.8 million. The attack, which exploited a reentry vulnerability in the network’s IBC hooks, raises questions about the security measures of the once celebrated blockchain protocol.

A web3 security company, Cyvers Alerts reported that the exploit occurred on July 31st and caused the company to lose 60 million ASTRO, 3.5 million USDC500,000 USDTand 2. 7 BitcoinThe flaw was discovered in April and allows cybercriminals to make payments non-stop by withdrawing money from the network.

Earth’s response

Subsequently, to the hack employed on the Terra blockchain, its official X platform declared the Suspension network operations for a few hours to apply the emergency measure. Finally in its sendTerra’s official account agreed, sharing that its operations are back online: the core transactions that make up the platform are now possible again.

However, the overall value of the various assets lost in the event was unclear.

Market Impact: ASTRO Crashes!

The hack had an immediate impact on the price of ASTRO, which dropped nearly 60% to $0.0206 following the network shutdown. This sharp decline highlights the vulnerability of token prices to security breaches and the resulting market volatility.

This incident is not the first time Terra has faced serious challenges. Earlier this year, the blockchain encountered significant problems that called into question its long-term viability. These repeated incidents underscore the need for stronger security measures to protect users’ assets and maintain trust in the network.

The recent Terra hack serves as a stark reminder of the ongoing security challenges in the blockchain space. As the platform works to regain stability, the broader crypto community will be watching closely.

This is a major setback for Terra. How do you think this will impact the blockchain industry?

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Blockchain

Luxembourg proposes updates to blockchain laws | Insights and resources

Published

4 months ago

1 August, 2024

BlockChainBulletin Staff

Luxembourg proposes updates to blockchain laws | Insights and resources

On July 24, 2024, the Ministry of Finance proposed Blockchain Bill IVwhich will provide greater flexibility and legal certainty for issuers using Distributed Ledger Technology (DLT). The bill will update three of Luxembourg’s financial laws, the Law of 6 April 2013 on dematerialised securitiesTHE Law of 5 April 1993 on the financial sector and the Law of 23 December 1998 establishing a financial sector supervisory commissionThis bill includes the additional option of a supervisory agent role and the inclusion of equity securities in dematerialized form.

DLT and Luxembourg

DLT is increasingly used in the financial and fund management sector in Luxembourg, offering numerous benefits and transforming various aspects of the industry.

Here are some examples:

Digital Bonds: Luxembourg has seen multiple digital bond issuances via DLT. For example, the European Investment Bank has issued bonds that are registered, transferred and stored via DLT processes. These bonds are governed by Luxembourg law and registered on proprietary DLT platforms.
Fund Administration: DLT can streamline fund administration processes, offering new opportunities and efficiencies for intermediaries, and can do the following:
- Automate capital calls and distributions using smart contracts,
- Simplify audits and ensure reporting accuracy through transparent and immutable transaction records.
Warranty Management: Luxembourg-based DLT platforms allow clients to swap ownership of baskets of securities between different collateral pools at precise times.
Tokenization: DLT is used to tokenize various assets, including real estate and luxury goods, by representing them in a tokenized and fractionalized format on the blockchain. This process can improve the liquidity and accessibility of traditionally illiquid assets.
Tokenization of investment funds: DLT is being explored for the tokenization of investment funds, which can streamline the supply chain, reduce costs, and enable faster transactions. DLT can automate various elements of the supply chain, reducing the need for reconciliations between entities such as custodians, administrators, and investment managers.
Issuance, settlement and payment platforms:Market participants are developing trusted networks using DLT technology to serve as a single source of shared truth among participants in financial instrument investment ecosystems.
Legal framework: Luxembourg has adapted its legal framework to accommodate DLT, recognising the validity and enforceability of DLT-based financial instruments. This includes the following:
- Allow the use of DLT for the issuance of dematerialized securities,
- Recognize DLT for the circulation of securities,
- Enabling financial collateral arrangements on DLT financial instruments.
Regulatory compliance: DLT can improve transparency in fund share ownership and regulatory compliance, providing fund managers with new opportunities for liquidity management and operational efficiency.
Financial inclusion: By leveraging DLT, Luxembourg aims to promote greater financial inclusion and participation, potentially creating a more diverse and resilient financial system.
Governance and ethics:The implementation of DLT can promote higher standards of governance and ethics, contributing to a more sustainable and responsible financial sector.

Luxembourg’s approach to DLT in finance and fund management is characterised by a principle of technology neutrality, recognising that innovative processes and technologies can contribute to improving financial services. This is exemplified by its commitment to creating a compatible legal and regulatory framework.

Short story

Luxembourg has already enacted three major blockchain-related laws, often referred to as Blockchain I, II and III.

Blockchain Law I (2019): This law, passed on March 1, 2019, was one of the first in the EU to recognize blockchain as equivalent to traditional transactions. It allowed the use of DLT for account registration, transfer, and materialization of securities.

Blockchain Law II (2021): Enacted on 22 January 2021, this law strengthened the Luxembourg legal framework on dematerialised securities. It recognised the possibility of using secure electronic registration mechanisms to issue such securities and expanded access for all credit institutions and investment firms.

Blockchain Act III (2023): Also known as Bill 8055, this is the most recent law in the blockchain field and was passed on March 14, 2023. This law has integrated the Luxembourg DLT framework in the following way:

Update of the Act of 5 August 2005 on provisions relating to financial collateral to enable the use of electronic DLT as collateral on financial instruments registered in securities accounts,
Implementation of EU Regulation 2022/858 on a pilot scheme for DLT-based market infrastructures (DLT Pilot Regulation),
Redefining the notion of financial instruments in Law of 5 April 1993 on the financial sector and the Law of 30 May 2018 on financial instruments markets to align with the corresponding European regulations, including MiFID.

The Blockchain III Act strengthened the collateral rules for digital assets and aimed to increase legal certainty by allowing securities accounts on DLT to be pledged, while maintaining the efficient system of the 2005 Act on Financial Collateral Arrangements.

With the Blockchain IV bill, Luxembourg will build on the foundations laid by previous Blockchain laws and aims to consolidate Luxembourg’s position as a leading hub for financial innovation in Europe.

Blockchain Bill IV

The key provisions of the Blockchain IV bill include the following:

Expanded scope: The bill expands the Luxembourg DLT legal framework to include equity securities in addition to debt securities. This expansion will allow the fund industry and transfer agents to use DLT to manage registers of shares and units, as well as to process fund shares.
New role of the control agent: The bill introduces the role of a control agent as an alternative to the central account custodian for the issuance of dematerialised securities via DLT. This control agent can be an EU investment firm or a credit institution chosen by the issuer. This new role does not replace the current central account custodian, but, like all other roles, it must be notified to the Commission de Surveillance du Secteur Financier (CSSF), which is designated as the competent supervisory authority. The notification must be submitted two months after the control agent starts its activities.
Responsibilities of the control agent: The control agent will manage the securities issuance account, verify the consistency between the securities issued and those registered on the DLT network, and supervise the chain of custody of the securities at the account holder and investor level.
Simplified payment processesThe bill allows issuers to meet payment obligations under securities (such as interest, dividends or repayments) as soon as they have paid the relevant amounts to the paying agent, settlement agent or central account custodian.
Simplified issuance and reconciliationThe bill simplifies the process of issuing, holding and reconciling dematerialized securities through DLT, eliminating the need for a central custodian to have a second level of custody and allowing securities to be credited directly to the accounts of investors or their delegates.
Smart Contract Integration:The new processes can be executed using smart contracts with the assistance of the control agent, potentially increasing efficiency and reducing intermediation.

These changes are expected to bring several benefits to the Luxembourg financial sector, including:

Fund Operations: Greater efficiency and reduced costs by leveraging DLT for the issuance and transfer of fund shares.
Financial transactions: Greater transparency and security.
Transparency of the regulatory environment: Increased attractiveness and competitiveness of the Luxembourg financial centre through greater legal clarity and flexibility for issuers and investors using DLT.
Smart Contracts: Potential for automation of contractual terms, reduction of intermediaries and improvement of transaction traceability through smart contracts.

Blockchain Bill IV is part of Luxembourg’s ongoing strategy to develop a strong digital ecosystem as part of its economy and maintain its status as a leading hub for financial innovation. Luxembourg is positioning itself at the forefront of Europe’s growing digital financial landscape by constantly updating its regulatory framework.

Local regulations, such as Luxembourg law, complement European regulations by providing a more specific legal framework, adapted to local specificities. These local laws, together with European initiatives, aim to improve both the use and the security of projects involving new technologies. They help establish clear standards and promote consumer trust, while promoting innovation and ensuring better protection against potential risks associated with these emerging technologies. Check out our latest posts on these topics and, for more information on this law, blockchain technology and the tokenization mechanism, do not hesitate to contact us.

We are available to discuss any project related to digital finance, cryptocurrencies and disruptive technologies.

This informational piece, which may be considered advertising under the ethics rules of some jurisdictions, is provided with the understanding that it does not constitute the rendering of legal or other professional advice by Goodwin or its attorneys. Past results do not guarantee a similar outcome.

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