Crypto-currency Incentive Model

Ethereum uses an incentive-based model for the creation of block.

The Proof of Work (PoW) puzzle winner or the miner that creates a new block is incentivized with the base fees of 3 Ethers and the transaction fees in the Ethereum blockchain.

The winning miner also gets the fees or the gas points for execution of the smart contract. There also may be other miners who also solved the puzzle besides the winner. These miners who solved the puzzle but didn't win the block are called Ommers. The blocks created by them are called Ommers blocks. These are added as Ommers blocks or the side blocks to the main chain. Ommer miners also get a small percentage of the total gas point as a constellation prize, and for network security.

Summary: Any transaction in Ethereum including the transfer of Ethers or executing Smart Contracts require some fee or gas points to be specified in the transaction. Miners are paid fees for security, validation, execution of smart contracts as well as the creation of blocks.

Mining is the process to secure the network by validating the computations, collecting them to form a block, verifying them and broadcasting.

What are Gas points?

Gas points in a transaction

Every operation in Ethereum requires fuel or Gas. Gas points are used to communicate fees instead of Ether for ease if computation using standard values. Gas points allow crypto-currency independent valuation of the transaction fee and computation fee.  Ether in value varies due to market swings but Gas points do not vary. Ethereum has specified Gas points for each type of operation. Mining process computes Gas points required for execution of a transaction. If the fee specified in the Gas points in the transaction is not sufficient, it is rejected. This is similar to mailing a letter with insufficient postage. The letter will not be delivered if it has insufficient postage. The gas points specified in the transaction must be present in the account for execution to happen. Any amount left over after the execution of the transaction is returned to the originating account.

Gas points in a block

Gas limit = the number of gas points available to a block to spend.

Gas spent = Actual amount of Gas spent at the creation of the block.