The Bitcoin network pays miners in two ways:
- Transaction fees
- Mining subsidy
Combined, these two payouts comprise a block's reward.
Block Reward = Transaction Fees + Mining Subsidy
The transaction that pays miners has a special name. They’re called coinbase transactions and are the first transaction included in any block. Miners use coinbase transactions to collect fees from transactions in a block and the block’s reward.
What are transaction fees?
Every time bitcoins are transferred from one wallet’s address to another, the sender incurs a fee. These fees are paid to miners who collect various transactions to include in new blocks. So, every time a new Bitcoin block is mined – roughly once every 10 minutes – the fees from all the transactions in any particular block are claimed by whoever mined the block.
Users can generally decide how much they want to pay miners for a given transaction. Yet, blocks can only fit so many transactions inside them. So, the average fee tends to rise as more people wish to send transactions at the same time. Conversely, when fewer transactions are waiting to be processed, fees decline.
But where do transactions go before being included in a block? Transactions sit in a waiting room called a “memory pool” (often referred to as the “mempool”) from where miners select transactions to be included in the next block. A transaction with a high fee is more likely to be picked out of the mempool during busy times.
Fee calculators are one helpful tool for selecting a fee that is both low and likely to be included in an upcoming block.
What is a mining subsidy?
A reward is paid to the miner who first successfully adds the next block to the network. Unlike transaction fees, which are highly variable, each block has a predetermined subsidy.
In May 2020, the subsidy dropped to its current rate of 6.25 BTC. When bitcoin first launched in 2009, each block carried a subsidy payout of 50 BTC. That amount drops by 50% every 210,000 blocks that are mined, or roughly every four years. These subsidy reduction intervals are commonly known as “halvings.”