ELI5 What are Masternodes?

So masternodes are being talked about basically everywhere but I notice that folks don’t really know what they are.

So here goes my ELI5 version.

With anything decentralized, such as cell phone stations or wired phone networks, you need a base station every few km to build trunks of phone lines and hierarchically organize stuff.

So you get those little brick structures sending wired phone lines or having small antennas every hundred yards or so, but then you have a neighborhood station where all those concentrate.

What are masternodes?

Masternodes are kinda like neighborhood repeater stations – only it’s for crypto.

Individuals are the little brick things every hundred meters. The masternode is the one turned on 24×7 and which concentrates transactions from all the individuals.

We know what those phone structures do (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.

Becoming a Masternode

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. Individual folks 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 start participating in the network. As time passes and it gains trust, more commissions start being shared with it along the way.

Not 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.

How much do masternodes make?

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).

Which cryptocurrencies have masternodes?

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.

Well 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.

References

2Masternodes

Masternodes Online

Masternodes PRO

Masternodes Rank

Dash.org Docs

on January 6, 2020