Masternodes are the latest cryptocurrency hot topic. Investors looking to make passive income in cryptocurrency have been taking a second look at several Proof of Stake technologies.
Despite all the social media hype, we’ve noticed that newbies don’t really know what they are or how to get started running one!
This is our ELI5 take on how Masternodes work, to get you quickly up to speed. We’ve provided links where you can continue your research, should you decide to learn more.
We’ll start from the very basics: decentralization.
In any decentralized architecture, such as cell phone stations for example, you need a participant the re-sends signals it receives, in order to keep it going for long distances. P2P network architectures also work like this, where network participants (nodes) pass data on to the neighboring peers.
Ever noticed those small containers with large antennas every hundred yards or so around your neighborhood?
Those are radio-base stations (RBS), which propagate the phone signal through the airwaves.
All the neighborhood RBS’s then concentrate their signals into a larger regional station, forming a cohesive regional system.
Masternodes are akin to neighborhood central stations – but for crypto.
The users are analog to the little brick things every hundred meters. The masternode is always on 24×7. It concentrates transactions from all the individuals.
We know what those cell phone structures do (they work like repeaters and switches).
So, what do masternodes do?
As the name suggests, masternodes are a special kind of network node.
The “master” part comes from network server terminology where “master” controllers usually take care of user logins and other trusted database functions.
Cryptocurrency masternodes don’t do any of that stuff though, since there are no logins or user data to take care of.
Masternodes take care of other special crypto functions, like anonymity in Dash (darksend). They also stay on 24 hours a day and receive some rewards for helping the network function smoothly.
Masternodes are decentralized.
No one sitting in an office anywhere chooses who can become a master node. So how does the network choose “trustworthy” masternodes?
By requiring the user to stake some cryptocurrency.
To become a masternode you’ve got to stake a significant amount of cryptocurrency to guarantee that you’re really serious about it. That’s mainly what sets regular nodes apart from masternodes.
Individuals can run nodes for free. Just turn on the PC, connect to network and leave the client running.
Not so for masternodes.
Masternodes must stake a minimum amount of crypto and then actively participate in the network. As time passes and it gains trust, more commissions start being shared with it along the way.
Note that the “stake” here is not related to Proof of Stake (PoS). The stake is a “deposit”, an insurance for the network, which in the end is the same idea behind PoS but it’s not how transactions get mined.
Dash remains a Proof of Work system, even though to become a masternode you need to stake some DASH.
Some masternodes report more than 40% ROI. Of course this varies a lot with cryptocurrencies and current transaction volumes.
In Dash, for instance, masternodes are elligible to receive up to 45% in block commissions. That’s a lot! Some folks report having made good $ with Dash, but with the 2018 bear market a lot of masternodes had to stop operating due to cash flow (paying bills in fiat money, earning in crypto).
The most popular cryptos that use masternodes are Dash, Pivx, PAC, MNPCoin, Energi, Horizen, DeviantCoin, BitGreen, Bulwark, SmartCash, ANON, VIVO, GoByte, Blocknet, Zcoin, Vechain, Waltonchain, OriginTrail, HPB among others.
I hope this ELI5 has helped you grasp the concept of masternodes.
It’s a nice way to seek passive income, but as you can imagine it’s also a high competition space. Competition means your profits are dilluted so with time the ROI with masternodes tends to go down. Still there is lots of business being made and passive income being raked in by just participating as a masternode.