The cryptocurrency industry has grown extensively since the creation of Bitcoin, and with this growth comes an array of new technologies, protocols, and models. One of the most necessary of these to understand is that of the masternode. Not every cryptocurrency uses masternodes, but as people move away from the methods of coins like Bitcoin and Litecoin, they are becoming more prominent.
What are Masternodes?
A masternode is a specific type of decentralized server which is used to perform certain tasks on a coin’s blockchain, such as adding privacy functions, providing instant transactions, or helping to store additional data. Masternodes are not necessarily a replacement to miners, but rather a service which runs alongside them. Several Proof-of-Work coins such as DASH use masternodes to accompany their miners.
To understand masternodes, we need to discuss briefly what a ‘full node’ is. A full node is a computer (or wallet) that contains a full copy of the blockchain for its specific coin and is used as a means of spreading the updated copy of the blockchain to other nodes. Full nodes are a necessary element of cryptocurrency as they handle the spreading of transactional data. They are what makes a coin decentralised— for instance, in a centralized network (like VISA) one server would distribute data to every other server with little checks or balances. However, with a decentralized network, every full node (or server) is responsible for distributing new data.
Masternodes do all of this, but they offer more features as well. They take more responsibility for the network than a standard full node because of their importance. Masternodes need to be more reliable, which means they almost always need to be online and fully synced to the blockchain.
Masternodes are also highly resistant to Sybil attacks, which is where an imposter disguises themselves as several servers so that they can bend the blockchain to their will. Understanding Sybil attacks is beyond the scope of this discussion, but you can find a (pretty in-depth) paper on them here.
Investing in a Masternode
Unlike full nodes, masternodes have monetary incentives. Running a masternode will make you eligible for a portion of every block reward that your server helped with (a block reward is a reward miners get for adding transactions to the blockchain). This can range from 2% to 30% depending on the coin you choose to run a masternode for. This reward is given out monthly, weekly, daily, or sometimes several times a day.
Unfortunately, there is a catch to this: Masternodes require you to deposit a large amount of money into your wallet before you can use them. This money is used to fund the masternode, and without it, you cannot run one. The money is still yours, you just cannot access it while the Masternode is live. Some masternodes, such as DASH, require amounts of up to $394,870 (1000 DASH) to begin. Others can be much cheaper, but DASH is often viewed as the ‘gold standard’ of masternodes since it was the first cryptocurrency using them to gain prominence.
You can find a list of cryptocurrencies with profitable masternodes here, but watch out because some of the coins listed can be considered scams.
A second catch is that to run a masternode you are going to need some computing knowledge. Setting up a masternode server is not particularly easy, especially if you have no experience working with servers before. You may also need to pay for hosting. If you don’t want to set one up yourself, and you want to be more ‘hands-off’ with your masternode, you can pay somebody else to do it. Masternode setup services can take a lot of the pain out of the process, but some consider it to be a waste of money.
Which coins use Masternodes?
Many cryptocurrencies use masternodes, but here are five of the most popular (with details on how much a masternode would cost).
DASH: 1000 coins needed ($394.87 per coin)
Luxcoin: 16,120 coins needed ($8.30 per coin)
PIVX: 10,000 coins needed ($5.51 per coin)
Phore: 10,000 coins needed ($1.74 per coin)
Hopefully, this sheds some light on what a masternode is, giving you a good basis for deciding whether you would want to set one up yourself. They can be somewhat expensive, but if you have to money to run one, they can also yield worthwhile returns.
Kai is a cryptocurrency copywriter and professional trader. He can often be found investigating various cryptocurrencies, whitepapers, and blockchain technologies. Kai has been a professional writer for 5+ years, and has invested in 50+ different coins and tokens. He also currently studies Law and Philosophy at university.