Masternodes are important participants in cryptocurrency networks. Not all cryptocurrency networks use masternodes, and not all masternodes work the same way. In 2014, the Dash cryptocurrency project was the first to implement the role of a masternode using the Proof-of-Service system, along with the widely used Proof-of-Work (PoW) mining.
Masternodes perform additional functions and responsibilities compared to ordinary miners on the network. For this, these nodes earn more than miners on the network. Each masternode network has its own unique features. However, they usually provide the same functions on different networks. This includes special rights with voting on protocol updates and responsibility for rapid deployment of network updates. They also work in such a way that they remain synchronized with each other, collectively serving as a source of information for everyone who wants to interact with the network. Moreover, if something goes wrong with the blockchain network, it is expected that the masternodes will be the first to know about it.
Although this is the article “Masternodes for beginners”, starting a masternode requires a certain level of technical knowledge. In addition, operators will need time and, as a rule, a large share or initial capital provided in advance as collateral. This should encourage honest behavior with the risk of losing secured funds if masternodes try to cheat the system. This works similarly to mining or staking. However, there are a few key differences.
Masternodes and mining
Our article would be incomplete without revealing the main differences between masternodes and mining. Although they are similar, there are differences between them. The first difference is the preliminary requirement, since masternodes often require large investments. However, masternodes can often perform more functions than mining nodes. Moreover, another difference between masternodes and mining is the lack of equipment necessary to become a masternode operator. Miners often need expensive mining equipment, whereas to place a masternode, a share is required as collateral.
A common misconception is that hosting a masternode is the same as staking, or an addition to Proof-of-Stake (PoS). However, this is not true, since Proof-of-Work (PoW) chains also use masternode systems. In addition, while PoS consensus models function much like a lottery, having a chance to receive a reward, masternodes receive a reward with a guaranteed income. A good example of this may be the spacebot crypto project
In addition, there is a blocking period for rewards for masternodes until participants decide to stop being masternodes. This is not like mining nodes, which often receive rewards that can be freely traded. The masternodes will receive their full secured bid and blocked rewards together if the operator decides not to place the masternode anymore.
What are Masternode tokens?
Masternode tokens or coins are cryptocurrency networks that use the masternode system. These are their own cryptocurrencies received by masternodes as a reward. They are responsible for verifying transactions among other functions on the network and thus receive a percentage of the reward for each block released on the network.
The number of awards received depends on the masternode system. The rewards for masternode tokens depend on factors such as the consensus model, the number of masternodes and the number of miners in the network. Moreover, masternodes work 24 hours a day, 7 days a week and therefore receive rewards on an ongoing basis.
The frequency of payment of tokens or rewards for masternode coins is individual for each network. This can be daily or several times during the day. However, as mentioned earlier, any earned rewards must be blocked with the help of already delivered tokens or masternode coins.
How to set masternodes
Setting up a masternode and becoming an operator usually involves certain requirements. Often, participants provide a minimum amount of cryptocurrency as collateral. In addition, masternodes usually need a full-fledged server with a dedicated IP address or a virtual private server (VPS). In addition, these servers must work around the clock with a constant uptime.
In addition, operators usually need a full copy of the blockchain. As a result, once the masternode is installed, it does not require special attention, except for keeping the node up to date, providing adequate support and maintaining the server’s operability.
What is a VPS?
A Virtual Private Server (VPS) is a virtual machine used to run a masternode. With the help of VPS, users can run an independent installation of the operating system on which the masternode is hosted. This provides a static IP address and 99% uptime to ensure the stability and efficiency of the masternodes while making a profit.
List of masternode coins
Below is a list of several of the most popular masternode coins and tokens available.
Dash is the first cryptocurrency project that has implemented the masternode system in its network. Dash masternodes are responsible for accelerating additional functions on the network, including instant transfers. Thus, they earn 45% of the reward for Dash blocks in return. The minimum deposit requirement for becoming a Dash masternode is 1000 DASH coins.
As a fork of Dash, Pivx claims to be a combination of the best features of Bitcoin and Dash. Pivx masternodes, often referred to as the backbone of the network, protect and verify the Pivx chain together with ordinary nodes. This means that as the number of masternodes increases, the security and speed of transaction completion also increases. Pivx masternodes get the right to vote, help with day-to-day operations on the network, and earn a share of network fees as a reward. The minimum deposit is 10,000 PIVX coins, while masternodes need to download the official wallet as an additional requirement.
Zcoin is a project focused on zero-knowledge proofs. The masternodes of this network are known as Znodes. Znodes are responsible for verifying transactions, earning 30% of the block reward at the time of writing. To become a Znode, operators must provide 1000 XZC coins as collateral. In addition, Znodes must have a virtual Private server (VPS) and 40 GB of free disk space.
The Syscoin platform is a decentralized platform for developers, offering users new development tools and ordinary nodes representing a separate peer-to-peer network. Network nodes and the Syscoin community can submit proposals for voting by masternodes. Masternodes must have a minimum collateral share of 100,000 Syscoin (SYS). According to the project’s website, masternodes can expect to receive a reward for their contribution to the network approximately every 24 hours. In addition, Syscoin offers operators a bonus of 35% to their basic rewards after a year of participation in the network. After two and a half years, this increases to a 100% bonus!
Although the following projects do not fall strictly into the category of masternode tokens, these cryptocurrency networks also use the masternode system. Moreover, they emphasize a wide range of minimum requirements to become a masternode.
For example, the NEM crypto project, short for New Economic Movement, requires a deposit of three million NEM tokens to become a super node. Regular nodes in the network that meet this requirement, as well as meet other special standards (for example, with high bandwidth), will be automatically updated to the status of the supernode as the highest-level consensus nodes.
On the other hand, VeChain manually selects its own masternodes with a limited number of 101 masternode operators in the network. With a minimum requirement to host 25 million VeChain (VET) tokens, masternodes are chosen because of their contribution to the network, in addition to simple node management.
But the number one oracle project, Chainlink, has no minimum collateral requirements to become a masternode. In addition, masternodes that provide collateral will receive additional features and exclusive advantages, since they can be considered more reliable.
Passive income with masternodes
Getting passive income with masternodes depends on several factors. This includes the network and cryptocurrency, upfront and operating costs, as well as price fluctuations. However, blocking collateral to become a masternode means that participants can keep their assets by hodling, rather than selling them. Thus, losses incurred from becoming a masternode usually occur only when the price of the asset used as collateral falls.
Provided that the income from checking transactions covers the costs, obtaining passive income from masternodes can be profitable. In addition, the use of masternodes gives other advantages. For example, they have a unique vision of blockchains and how they work, and also have a certain responsibility in the network for its smooth operation.
However, becoming a masternode comes with a risk. Although this may be an attractive prospect, cryptocurrencies can be unstable. Thus, the value of assets used as collateral can fall significantly (although, equally, it can also rise). In addition, while a project can be innovative and useful, it can be difficult to sell a crypto asset needed as collateral if it is only available in thin or illiquid markets. Moreover, if you are unable to maintain constant performance or update your masternode, you may lose profit as a result.
Now you know that masternodes differ depending on the network they support. Although they may have a lot in common, no two masternode networks are identical. Depending on the underlying protocol and the specifics of the consensus mechanism, they can perform a number of important roles. Thus, masternodes are often generously paid for with their own coins.