How does the block reward work in Bitcoin

You may have wondered how miners are rewarded for their work? It's thanks to the block reward system, a fundamental mechanism of how Bitcoin and other cryptocurrencies operate.

The composition of the block reward

Specifically, the block reward is divided into two distinct parts. On one side, you have the block subsidy, which represents the new units of cryptocurrency created and distributed to the miner. On the other side, there are the transaction fees, which are all the fees paid by users for their transactions to be included in this block.

In practice, since the block subsidy largely dominates the fees, many people use the two terms interchangeably. When we talk about “block reward” in everyday conversations, we mainly think of the subsidy.

The halving: the system of gradual reduction

For Bitcoin, the scenario is particularly interesting. At the start of the network, the block subsidy was set at 50 BTC. But here's the thing: this reward is halved every 210,000 blocks, or approximately every four years. This phenomenon is called halving.

Since the launch, we have already witnessed several halvings. In 2012, the reward dropped from 50 BTC to 25 BTC. Then in 2016, it went down to 12.5 BTC. And in 2020, we ended up with 6.25 BTC. This mechanism ensures a gradual and predictable issuance of new bitcoins.

The coinbase transaction: where does the money come from?

You may be wondering how these new units magically appear? It's thanks to a special type of transaction called coinbase transaction. This transaction is usually the first to be included in each block.

The originality of the coinbase transaction is that it generates cryptocurrencies from nothing. Unlike normal transactions that have inputs (inputs) from other transactions, the coinbase transaction has a blank input, which allows it to create value ex nihilo.

This elegant system ensures that miners are incentivized to validate new blocks while maintaining strict control over monetary creation.