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I understand that there needs to be an incentive for the nodes to be keeping the blockchain up and running by validating blocks, and mining rewards is that incentive.

I fail to understand why does mining reward not get drawn from the sum of transaction fees in that block? That is what will happen on the Bitcoin network once all the 21million coins have been mined

In that respect, why doesn't Ethereum have a higher limit? Will it ever exist? If so, why? Wouldn't uncapped coins have an inflation effect?

I'm sorry i think i have clubbed in multiple questions here, but they are doubts arising from the same mental model.

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Mining reward doesnt only serve as an incentive for miners but it is also the way new coins are created. Without it there wouldnt be any coins created, beside the genesis block.

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    Can you explain why coins being created is a good thing, if that's what you're implying? Why is continuous issuance - monetary inflation - a good thing, rather than monetary deflation? – Richard Horrocks Mar 2 at 23:46
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    It isnt a good thing. You need a way to distribute the coins so that everyone has a chance to participate. For example, Satoshi sent an email to the crypto listserv when anyone couldve mined bitcoins. Joe Lubin spent the millions he made at goldman, probably from investing in oil companies, to premine Ethereum. These are how currencies spread their supply. It has nothing to do with inflation or deflation, at least initially. – nick carraway Mar 3 at 5:38
  • Would've been good to add references to the yellow paper. – Carlos Fuentes Aug 6 at 7:06
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From the yellow paper:

2. The Blockchain Paradigm

[...] Blocks function as a journal, recording a series of transactions together with the previous block and an identifier for the final state (though do not store the final state itself—that would be far too big). They also punctuate the transaction series with incentives for nodes to mine. This incentivization takes place as a state-transition function, adding value to a nominated account.

And

11.5. Mining Proof-of-Work.

[...] However, since mining new blocks comes with an attached reward, the proof-of-work not only functions as a method of securing confidence that the blockchain will remain canonical into the future, but also as a wealth distribution mechanism.


This answers your main question. Why not just let the reward just be the fees of the transactions included in the block? Maybe it wouldn't be a good enough incentive.

"Why doesn't Ethereum have a higher limit? Will it ever exist? If so, why? Wouldn't uncapped coins have an inflation effect?"

Uncapped coins do have an inflationary effect. Still, remember that there isn't everything set in stone about this. There may be changes in the future and a lot of factors must be taken into consideration by the developer team.

As it is said in this article:

Ethereum, or rather Ether, the cryptocurrency of Ethereum, does not have a deflatory nature, but an inflationary one. In short, you will never stop issuing new ETHs. According to some forecasts, the inflation rate of the circulating supply of Ether will tend to approach a rate of 1% by the 64th year of its existence, that is in about 2078.

However, this does not mean that rewards will not decrease.

Every now and then they rewards are reduced, as the growth graph of ETH’s circulating supply shows, even though this is not predetermined, and we do not know of how much premiums will be reduced every time. In Bitcoin the problem does not arise, because halving is predetermined and is an integral part of the protocol, while for Ether the decisions of when to reduce the premium, and how much to reduce it, is made over time.

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