Block reward distribution is conducted through proof of work, wherein miners collect and write transactions into blocks and collect fees to do so. Each block in Loki contains multiple reward output of which only one goes to the miner.

Loki Block Reward

To prove that a service node is holding the required collateral, time locked outputs are used. These allow Loki coins to be time locked until the blockchain reaches a defined block height. Until then, the network invalidates attempts to spend the time locked outputs, preventing shuffling of collateral and proving an amount is being held by a specific service node.

Collateral Proof

Much of Loki's networking functionality is enabled by a set of incentivized nodes called Service Nodes. To operate Service Nodes, an operator time locks a significant amount of Loki and provides a minimum level of bandwidth and storage to the network. In return, operators receive a portion of the block reward form each block.

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Loki Elements

Service Nodes allow users to transmit and receive data packets anonymously. Loki Messenger is another such privacy function, allowing for decentralized and end to end encrypted messaging without the reliance of a third party messenger.

Privacy and Security in Loki

https://loki.network/wp-content/uploads/2018/10/LokiWhitepaperV3_1.pdf

Loki Whitepaper

Loki bases its code off of Monero due to the high level of privacy it is able to provide. Monera is an evolution of the CryptoNote protocol, which uses ring signatures, stealth addresses, and RingCT to give users the ability to sign transactions and obfuscate amounts while maintaining deniability. 

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