What is a Masternode and how do they work?
Masternode is becoming a popular term recently, but to many of you is probably new and actually unknown. Don’t worry because there are also some people who although they have been involved personally in cryptocurrency have a problem understanding the core meaning of it. If this is an issue to you then stick around. In this article, we’ve covered everything you need to know about the masternode and their coins.
What is a masternode?
In simple words, a server which runs and validates transactions under a consensus-based protocol in a decentralized network of connected computational devices. In this sense, they are similar to normal nodes, but there are few additional special features associated with it, hence the name masternode.
Here comes a common mistake most people do, who tend to think of masternode coins as Proof of Stake nodes. This happens even to some who have been involved in cryptocurrency for quite a while and supposedly should understand the logic of all this stuff.
To make the difference let us a give a short and simplified definition of each. So, in Proof of Stake coins you need to stake a certain amount of your coins in the blockchain to be given the right to validate the transactions and get the reward in the process. You might be thinking: Well this is the same as in masternode coins, right? You collect a certain amount of coins and you stake them in the network to run them.
Basically, yes. But Proof of Stake is just a consensus based-protocol which applies only to a limited number of coins which have supported it. In contrast, you can run a masternode regardless of the type of the coin you’re investing as long as and you have collected coins above the fixed amount. Plus, in Proof of Stake nodes the validator gets only a fixed reward while a masternode gets 45% of the block reward because it solves the cryptographic puzzle and 45% because it helps to validate and store transactions. Said otherwise by running a masternode you can earn more than a normal mode.
Bitcoin, for example, does not support the Proof of Stake protocol, yet you can run a masternode in Bitcoin’s blockchain. For those who are not familiar, a normal node is actually a device that runs, validates and saves transactions to the blockchain history by using its hashing power. Conversely, a masternode completes other additional tasks to ensure the laws of operation in a blockchain are applied as regulated.
Keep in mind that is are a decentralized network of blockchainers and all of the above tasks are carried out by the entire group simultaneously.
Hint: Masternodes are mostly referred shortly as MN. For the first time, DASH masternodes were introduced in 2017 and ever-since it has become a central point of interest for many people keen on cryptocurrency.
Who can run a masternode?
Now that you have a basic understanding of what a is it and how it works, you probably want to know if you’re eligible to run one. Basically, everyone who possesses a computational device whose capacity is sufficient to run cryptographic hashing functions (mostly a computer or a laptop) is eligible to run a masternode.
However, there are still some requirements you have to fulfill in order to collect to become masternode and gain reward aside from having a computer or a laptop that can validate and store transactions. These requirements change depending on the coin you’re willing to invest in. That said, we suggest you always check the specific coin you’re willing to enter.
First it has to do with the so-called entry barrier. Everyone willing to invest in a certain coin must first collect a minimum of coins then stake those in the blockchain. The minimum number of coins required to get a masternode changes depending on the coin.
Note that although you may think of this as a disadvantage related to the blockchain it is actually the contrary. That is because in such way participants are fully ensured that the risk one masternode can take to run away with a lot of rewards can never exceed why he actually has put as a stake. Said otherwise it discourages him to do so.
Apart from blockchain’s entry barrier what else you need in order to run a masternode?
- A certain number of that particular coins you’re willing to invest in
- A Virtual Private Server (VPS) or a server to run your wallet 24 x 7
- An IP address for your server so every other member in the blockchain can easily reach you
Note that these common requirements to run a masternode, but there may be few additional requirements for some coins.
But, is there any way I can actually reach the required numbers of coins to stake them and get a masternode?
By the way, this is just another advantage these features grant you, but we’ll cover that in the next section. You can reach the minimum amount of coins to be allowed to run a masternode in a blockchain by joining staking pools. If you’re familiar with mining pools then understanding what are staking pools is not hard at all, as both are similar in essence.
Staking pools are a group of nodes in the server that join together their individual hashing powers for two main purposes:
- If a blockchainer doesn’t have the minimum required coins to get a masternode he or she can join its coin wallet to a pool of other stakers to reach (or exceed) that amount of coins.
- To increase the chances of validating the transactions knowing that this process is a linear function of hashing powers. The higher hashing capacities the higher chances for saving the block in the network and getting the reward.
Simply said, it is a fantastic opportunity for you to earn rewards even if you don’t have the required coins to get a masternode in the first place.
With this in mind, it is not hard to see what advantages do masternode staking pools award to blockchainers. However there are still some issues related to staking pools which we’ll cover down below on another section. Up to this point, you were told that you need first to invest a certain amount of coins so quite reasonably the question arises: how do I get rewarded? At the end of the day, this is why all of us want to invest in masternodes.
Actually, the reward system here is another detail that differentiates normal nodes from masternodes. Furthermore, this is the stage where most people are confused if masternodes and PoS coins are actually the same thing. Without getting to a detailed explanation you must understand that they’re not the same thing although in essence in both of them you need first to stake a certain amount of digital wealth.
Advantages and disadvantages
Overall, there are more benefits than not. An indication of this can be the fact that the number of coins that have introduced this system has overpassed 400 and is still continually increasing.
- An effective and attractive reward system
- Private Transactions: The PrivateSend feature enables miners to run private transactions which are not the case with coins like Bitcoin where only the identity of address remains unrevealed)
- Instant Transactions: Due to the fact that masternodes run more powerful hashing machines, transactions are made instantly. It takes few minutes to complete these transactions for normal nodes. For example, the transaction between two Bitcoin miners takes 10 minutes.
- Staking Pools: Blockchainers can join their hashing powers under a certain agreement in order to increase the chances of solving blockchain transactions and get the reward in the process.
- Regular incomes in monthly and yearly basis: Miners in normal nodes can only get the reward if they validate a transaction. Masternodes, on the other hand, can receive additional gains in monthly or yearly basis. For example, within a year, DASH masternodes can earn over £200,000. Note that this changes depending on the type of coins.
- Governance and Voting access: Masternodes are active participants decision-making which affects all the network. One possible situation when a participant can use his voting right is during budgetary proposals.
On the other hand, there are still few issues related to masternodes, but which are avoidable. First, you need to kind a predict the reward/ratio before making an investment in case you don’t want to wait for a long time to regain your invested coins.
Plus, you need to be cautious with mining pools because there’s an evident risk that somebody may try to walk away with a certain amount of coins causing damage to you. Actually, this matter is being a serious thought up to now, but there are still no definite solutions. The so-called smart contracts are a way to tackle this problem but there’s a still no evidence of any big project using it as a solution.
Cost is another issue with masternode coins. It is understandable that to run all those additional features compared to normal coins, higher mining energy or hashing power if you will and more available electricity is required. This is to say you might have to spend a lot on buying servers to run transactions and validations and electricity at the same time.
Also, you will need a more powerful hashing you must be willing to spend a bit at the beginning and be patient with the reward