Why Learn What is a Masternode in Cryptocurrency?
Before we dive deeper into what a Masternode is, let us first understand what a node is. A node is basically a computing device which maintains a network. A phone, computer or any other device which has the ability to receive, transmit, contribute to the blockchain is considered a node.
Masternode, as its name suggests, is greater than a node in terms of having roles which a regular node does not have. A masternode is a computing device which hosts the full blockchain ledger of a certain cryptocurrency. They provide incentives to node operators to carry out the core functions of running a blockchain.
Masternodes came about as the solution to the increasing costs and technical complications that are involved in the running of a full node on a blockchain network. Due to the issues regarding cost and technicality, running a node on a blockchain network would commonly result in a decline in nodes and it is not really profitable.
The decline in nodes will then affect the efficiency of the blockchain which can result in network congestion and longer processing time of transactions. Therefore, masternodes are operated as a kind of backbone to blockchain networks, providing a solution to these problems through their collateral-based system.
About Node Operators
Those who host masternode on their computing device are known as node operators. The good news is that just like full nodes, anybody can be a node operator to run masternodes. The purpose is to achieve sufficient decentralization such that no single person will have control over a significant portion of masternodes.
For the running of a masternode, node operators are required to take a stake in terms of crypto coins. This means they must stake a certain amount of coins in their crypto wallet. These will remain in their crypto wallet for as long as the person runs the masternode. However, there will be a minimum amount of stake required for them to participate.
The exact amount of stake will vary, and the frequency of block rewards will also vary depending on the masternode program of the particular cryptocurrency. For example, the amount of stake required by Dash is 1000 Dash coins. This amount is also known as the collateral, held in your crypto wallet in sync with the blockchain.
The collateralization of coins is required to make sure that the node operator does not cheat and corrupt the system. It is put in place so that the node operator has something at stake and therefore, will be careful in running the whole system so that he/she will not receive punishment for not doing so. If any fraud or corruption is detected, the punishment given will be in the form of HODLing devaluation.
If this collateral is moved or spent, the masternode will stop working and the payment to node operators also stops. Or, if a masternode stops providing services to the blockchain network for over an hour, it will be removed from the list until normal services are resumed. This is how node operators are incentivized to continually offer efficient, reliable services for the network.
Due to this reward system for node operators, there is no worry that there will be a lack of masternodes. Having so many servers operating the full copy of blockchain and working for the coin provides great speed and efficiency. The greater the number of masternodes, the better and safer the network will be.
Benefits of Hosting Masternode
Node operators for masternode enjoy benefits apart from being able to directly contribute to the ecosystem of the coin. That is, they will be awarded with passive income, governance rights and investment strategies.
Owning a masternode opens the opportunity for node operators to grow their passive income exponentially. They can enjoy passive income through performing ledger functions. This includes creating instant transactions and private transactions. Instant transactions are also known as “InstantSend” while private transactions are also known as “PrivateSend”.
Node operators also have the benefit of being a part of the network’s success by participating in the decision making regarding the network, including governance. They are allowed to play a part through casting votes on different decisions and proposals.
Masternodes provide predictable returns to the node operators as an incentive for them to run the network. This also means that there is the opportunity for node operators to hedge their risks of investing in crypto assets which have much volatility.
Masternode vs Other Ways of Earning Crypto
The passive income enjoyed through masternode is pretty different compared to mining crypto, due to a few factors. Firstly, there is a difference in energy. The energy required for operating masternodes are less compared to operating cryptocurrency mining. Node operators also need fewer hardware and hence enjoy lower computing costs compared to crypto miners.
Secondly, by operating masternode, this is a more passive type of investing as compared to crypto day trading. This can appeal more to those who may not have the time to get involved with day trading and masternode may be the choice to grow their crypto holdings.
While masternodes offer crypto savings accounts which will earn over time, it will inevitably still be vulnerable to market volatility. Therefore, it is the role of node operators to make sure that there is optimal running of the blockchain network and efficiency of the functions.
Although masternodes are not excluded from the impact of market volatility, it is also true that node operators get to enjoy lower volatility compared to crypto day traders due to the regular payouts and potential for long term earnings.
How Much You Can Earn by Running Masternode
Node operators have the potential to earn from 5% to 20% of each block reward. This depends on the level of volatility in the crypto market as well as a couple of variances. The variances include these factors:
- The type of crypto coin
- The value of coin over time (whether it appreciates or depreciates)
- Frequency of payouts
- Underlying blockchain projects (whether it is successful)
- Amount of your stake
- Condition of the crypto market (whether it is bullish or bearish)
Earnings of node operators will also be dependent upon the frequency of block rewards. While some coins issue them once a day, some may issue a few times in a day.
Dash and Masternode
Dash was the first virtual currency which adopted the model of masternode. The name “Dash” comes from the words “Digital Cash”. Dash, formerly known as Darkcoin or Xcoin, is a cryptocurrency that was created as a fork of Bitcoin in order to meet the need of faster and more private transactions for users.
Being created as a fork of Bitcoin simply means that the existent code was duplicated from Bitcoin then enhanced to address the issues faced by users. Therefore, Dash offers quicker confirmation time as well as better privacy features than Bitcoin, with its more anonymous services.
The network that Dash runs on is masternode. Masternode enables a decentralized governance platform for Dash. Masternodes have special jobs. This includes creating instant transactions and private transactions. Instant transactions are also known as “InstantSend”.
Through the InstantSend function, Masternode facilitates transition locking. Private transactions are also known as “PrivateSend”. Since they are private, they hide the fact that money is sent. Through the PrivateSend function, masternode coordinates coin mixing.
The PrivateSend function, previously known as DarkSend, is a coinjoin mixing technique. This is also known as coin mixing. This technique protects Dash users by allowing the transactions done by users among each other to be anonymised. Coinjoin technique requires multiple parties to sign an agreement jointly in order to mix their coins when participating in separate transactions.
This strategy makes it more complicated for external parties to identify which party is making a particular transaction. At least three users will have their transactions merged together in order to obscure the trail of funds.
Requirements for Masternode
Firstly, 1000 Dash is the requirement to be held for collateral. This can arguably be the hardest part. Dash can be obtained from exchanges like LiveCoin, Kraken and Poloniex. Secondly, the next thing is to have a server or VPS running Linux that is able to provide 24/7 uptime.
VPS services like DigitalOcean or Vultr are recommended, but as long as you have a decent provider, that will do. Thirdly, you will need a dedicated IP address, which would come along with the server. Fourthly, the minimum requirements for hardware are as such for Dash version 0.14 and above:
|CPU||1 x 1 GHz||1 x 2 GHz|
|RAM||2GB + 2GB swap||4GB + 4GB swap|
|Network||400GB per month||1TB per month|
Lastly, prepare to set aside some time for setup. The good thing, however, is that while some masternodes require complicated setup, tools by Dash have made this process more simplified. While these are the requirements for Dash, the requirements are pretty much the same for any other masternode cryptocurrency.
Invest In Masternode Without Being a Node Operator
To invest in a masternode, you can become a node operator to earn the passive income that comes with it. However, if you do not wish to host a server and support the network’s function, do not worry because you can still be an investor in masternode coins.
If you are not sure where to start, a good place would be to choose which masternode coin you are interested to invest in by getting data on the coins from an aggregator website such as masternodes.online. Then, you can simply search for that coin among cryptocurrency exchanges, sign up and purchase it.
Another way of investment in masternodes is to do so via a third party masternode fund. A fund like this will put together a portfolio of the top performing nodes. However, they are relatively new which also means they are riskier.
Finding The Right Masternode
As suggested above, we would recommend you to visit aggregator websites that carry information regarding the different masternode coins available. This enables you to make a comparison among coins. Referring to masternodes.online website, these are the terminologies and what they mean:
- Coin: The name of the masternode coins
- Price: The current price of masternode coin available on crypto exchanges
- Change: The percentage change in price of coin over the past 24 hours (green for increase, red for decrease)
- Volume: The absolute amount of USD worth of coins traded in the past 24 hours
- Market Cap: The product of the number of coins circulating and the price of coin
- ROI: The annual return on investment
- Nodes: The total amount of nodes running on a particular network
- # required: The amount of stake needed in order to run a node
- Mn worth: The minimum worth of investment needed to run a node (product of the number of coins and the current price)
Apart from looking at the basic details of each masternode, there are a couple of factors to take into consideration in your decision making. These factors are liquidity, trend, number of nodes and the team behind the coin.
Liquidity is one of the most important factors to look at. This is because liquidity and volatility have a high correlation. Typically, the higher the liquidity, the more reliable the market will be. This is because a thin or illiquid market can easily become volatile. Therefore, it is important to check on how many exchanges are actually offering the masternode.
You should also take it one step further to check which exchanges exactly are offering them, and do some research on those exchanges and their history of reliability. Another thing to note is that when masternodes do not have information regarding market cap, this can be a warning sign that the liquidity is low.
Number of Nodes
The amount of nodes available gives you insight regarding the project’s longevity. Typically, the longer a project goes on, the more nodes it will have. However, there are times where nodes are inactive too as their operators leave them, so this cannot be your sole determining factor.
The Team Behind The Coin
It is good to look into the team behind the coin as well as the project behind it to gather more insight. For example, reading up their website, chartered history of the coin, and even feedback from the community.
It is also important to keep an eye out for the price trend. This is because if a downward trend is expected, a wise strategy is to wait and watch the price fall before purchasing your stake.
To sum it up, a masternode is a computing device that hosts the full blockchain ledger of a certain cryptocurrency. They incentivize node operators to carry out the core functions of running a blockchain. The special functions performed include increasing transaction privacy, carrying out instant transactions and the participation in governance and voting.
Masternodes have come a long way. There was somewhat a poor reputation back in 2018 where masternodes were associated with certain scams. However, they have emerged even stronger now through the emergence of more developed coins and more knowledgeable crypto investors.
The interest in masternodes is sure to rise in the years to come and we anticipate seeing masternodes expand to play different roles, such as in the crypto commodities market. We look forward to the possibilities and hope that this article has helped you to see it too.
With over 10 years of experience working as a financial analyst, Eric is highly aware of the potential of cryptocurrency, particularly Bitcoin, and the impact it will bring towards the global economy. He is committed to share everything he knows about crypto here at Crypto Digest News.