What is a masternode and how it works?
By Rafał - 2020-10-08
How a cryptocurrency works depends on the transaction validation system. Blockchains using PoW, namely Proof of Work work thanks to the activity of miners, while those using PoS for Proof of Stake, work thanks to a Masternode system or a standard staking system implemented in the network. However, masternodes are a great point of interest to generate a passive income over time, especially if the chosen project is severely undervalued. The term masternode can be compared as "Central Node" or "Main Node". The term node in computer science refers to a machine that is part of a network and constitutes one of the pillars of said network, through which communications pass. So we can say that Masternodes simply represent a special category of nodes, and that they remain more important than classical nodes.
What is a masternode?
In their early days, blockchains functioned only through a consensus system of Proof of Work. This, although extremely secure, quickly showed certain limits, both in its capacity to manage numerous transactions and in its supposed energy consumption. To address this issue, developers have been thinking about new consensus models like Proof of Stake. It is within the framework of this consensus that the masternodes come into action. Indeed, Masternodes are computer/servers whose mission is to ensure the proper functioning of a blockchain in Proof of Stake. These will store a copy of the entire blockchain as well as validate new transactions that traverse the network. In exchange, the actors who operate these nodes are rewarded with the new pieces created for each block. The first cryptocurrency to have implemented this system was DASH in 2014, today many blockchains operate in this mode.
How does it work?
As we have stated previously, masternodes are part of the consensus family in Proof of Stake. As a result, they work through the staking of a given amount of cryptocurrency serving as collateral to function. For example, to operate a DASH masternode it will be necessary to collect 1000 DASH. Once the tokens have been purchased, the user will have to deposit the funds into the wallet of the cryptocurrency for which he wishes to operate a masternode. Then two methods are available to him, either the user decides to operate the server himself on which his node will be hosted, or he calls on a specialized company to assist and maintain it at its own expense and thus help him earn passive income. Once the node is online on the network, whether the user has hosted it themselves or passed through a third-party service, the latter will participate in the validation of transactions that traverse the network. To reward it, the network will allocate the newly created tokens to each block, the transactions of which it has validated, this reward being commonly called reward.
How to set up a masternode?
Setting up a masternode will require technical skills. Indeed, each cryptocurrency will have specific installation features that will need to be retrieved from official documentation. First, the user will need to obtain the number of tokens needed to act as collateral. In this case, use your favorite trading platform to acquire some.
Then you will need to rent a Linux server from a VPS provider. Once the server is acquired, the user will have to download the wallet of the crypto for which he wishes to operate a masternode.
Once the wallet is installed, you will need to send the necessary funds for the collateral to it. After configuring the masternode, the wallet will have to synchronize the entire blockchain and will only then begin to take part in the transaction validation process once it is synchronized.
However, the user will need to remain vigilant and ensure that his masternode meets the minimum uptime conditions to qualify for the rewards. Most often the node requires you to be online at least 92% of the time. Also, the masternode operator will need to monitor network updates closely and deploy them on time, to continue to reap the rewards. In other words, you have to be careful and have time to devote to your masternode experience: autonomous management is not necessarily easy. You will understand that setting up a masternode requires a lot of technical skills mainly related to the use of a Linux server. Also, it will require constant vigilance to perform maintenance tasks as soon as necessary. If you are still looking to launch one, our complete article may a helpful resource to start with, or to accompany you through the entire process to put one online : https://mastersofnodes.com/complete-masternode-setup-guide
Why invest in a masternode to earn a passive income?
Contribute to the network
First, operating a masternode will allow you to take part in the life of the network. Indeed, by operating a masternode you will help validate transactions and therefore work to secure the blockchain. In addition, in some cases, your masternode also gives you rights regarding the governance of the blockchain. Thus, you could potentially be called upon to vote during an important decision on the future of the network and on potential modifications to its functioning. If you've always wanted to be part of the verification process and make your contribution to the decentralized edifice of cryptocurrency, masternodes are a great entry point.
Generate passive income
Another point, which most of the time is the main reason for operating a node, is the financial aspect. Indeed, on the same credo as mining, operating a masternode will allow the generation of passive income in cryptocurrencies. As we have seen, masternodes are used to generate rewards when they validate new transactions within blocks Obviously, like any investment, masternodes come with risks. Indeed, the purchase of collateral represents an investment, and its value can vary greatly upwards as well as downwards due to the volatility of the prices of the cryptosphere.
Which masternode to choose?
With over 10 000 cryptocurrencies in existence, the list of cryptos using masternodes is also extremely long. We can however quote some serious projects which have proven to be valuable investments for the long-run ( Disclaimer: This list shouldn’t be considered as a financial advice)
How to choose wisely
Before selecting a masternode, it is important to sift through various parameters to ensure the profitability and duration of the investment.
Development Team: Research the development team. Is it revealed on the site? Is she qualified?
The community: Is there an active community for this crypto? Social medias growth can be a good indicator too
Goal & milestones: Does the project have a specific goal or innovation? How popular could this idea become?
Liquidity: Is the project liquid? For example, does it have a good volume of trading on various platforms ? to be able to add more masternodes or to be able to sell when needed.
Infrastructure and materials: Does the coin offer a periodically updated wallet or no more development team? Self-hosted or delegated masternode?
However, if you have no technical skills or don't particularly want to take the lead, many third-party providers have created specific services to hold manage masternodes against a small fee. If you have already tried the masternode adventure or are willing to invest a significant amount of money, you can opt for full masternodes. Conversely, for a first experience or in the case of a small contribution, prefer shared masternodes, which will allow you to have a first experience with the world of masternodes while limiting the risks.
Finally, another strategy could be to take a stake in different shared masternodes to once again divide the risks between different projects.
With the rise of Proof of Stake and the proliferation of masternode wedges, more and more investors are turning to masternodes to the detriment of traditional mining. One of the advantages lies in the liquidity of these solutions. In fact, when stopping a mining activity, the equipment must be resold and this step is often tedious and costly in terms of time and money. Conversely, to stop masternode activity, simply stop the hosting subscription and sell the collateral on the marketplaces.