How Do Masternodes Work? A Basic Guide

A masternode is a series of servers or validator that sustain a network. They are used to complete transactions that ordinary servers can’t handle. From features like direct send, governance and private transactions, these nodes are much more powerful. Thanks to their increased capabilities, running a masternode is much more expensive than running a standalone server. However, the incentive that a lot of owners have is that they could get a percentage of block rewards in whatever crypto-asset they choose to support. The first cryptocurrency to implement the masternode protocol was DASH. Under what it described the “proof-of-service” algorithm, the company implemented a second-tier network of masternodes along with the first tier of network miners. Together, they achieved a distributed consensus on the DASH blockchain. With this double-tiered system, DASH was able to amalgamate the benefits of proof-of-work and proof-of-service. While DASH was the forerunner, a lot of crypto-asset networks have implemented the masternode protocol into their operations. Some popular cryptocurrencies that rely on masternodes in their networks include Block, GoByte, ION, ChainCoin, and others.

Nodes and Full nodes

A masternode is different from a full node and a node. A Node is a client that operates on the network that can send and receive transactions. A good example of a node is the Electrum Dash. A Full Node has the capabilities of a node plus more. It can send and receive transactions, maintain a copy and update the blockchain with new transactions and confirmations from miners.

The Difference Between Running a Masternode and Mining

Since a masternode has more functionality than a regular node, it requires a significant level of investment to run one. However, people who run masternodes are highly motivated, and they usually end up taking a huge chunk of the block rewards. While there are similarities between masternodes and mining (especially PoS mining), they aren’t the same thing. When you run a masternode, all you have to do is hold on to your coins and gain passive income- quite similar to PoS mining. However, the most significant difference between the two is that you don’t need to get mining gear to earn with a masternode. Masternodes also provide greater transaction privacy, faster block generation speeds, and they aren’t as electricity-consuming as mining is.

The Mechanics of Masternodes

Just like it is with proof-of-stake mining, masternodes rely on users staking a specific amount of a cryptocurrency on the asset’s network. One of the requirements for setting up masternode is purchasing a substantial amount of that currency. For instance, you’ll need 1,000 DASH to run a masternode on the currency’s network- in today’s market, that’s about $105,000. When you purchase the tokens, you’ll need to stake them to get your passive income. You download the currency’s core wallet and set up your computer as a server. Once your masternode is active, it will be able to accommodate a specific set of functions, including anonymous payments and instant buy. You are also able to vote on important developments happening within the blockchain. As compensation, you get a share of block rewards and share them with the blockchain’s miners. Usually, masternodes share 45 percent of block rewards with the miners, while 10 percent goes to the blockchain’s native treasury. It’s also worth noting that merely holding the amount of a digital asset required to run a masternode isn’t the only thing. Every currency has its prerequisites for maintaining masternodes, and a masternode will cease operating if these conditions aren’t met, or if the currency is suddenly moved from its staking position. Running a masternode shares similarities with the proof-of-stake mining system in that operators are able to generate passive income by just holding their coins, as stakers do in PoS. However, a lot of people have made the mistake of comparing the way masternodes work to the proof-of-stake mining method. As we’ve explained with DASH, there are PoW networks that also use masternodes, so these kinds of nodes aren’t exclusive to single mining method.

Potential Earnings Via Masternode Administration

This usually depends on some factors, including:

1. The asset you select
2. The coin’s way of facilitating masternodes
3. Your selected coin’s performance over time

These factors differ from network to network, which means some coins could end up creating more profits for investors than others. On average, most masternode operators are typically rewarded with an income between 5 to 20 percent of a block reward, depending on the cryptocurrency involved. The rewards are used to balance out the costs of running the servers. They also serve as an incentive for the creation of more masternodes.

Meaningful Use Cases for Masternodes.

DASH is the pioneer developer of masternodes and they were created to implement some crucial services for its network. These include instantaneous transactions (InstaSend), anonymous payments (PrivateSend) and decentralized governance for the blockchain. DASH’s model is now being used by other projects in several forms.

1. PIVX

PIVX is an upstart project that uses the masternodes model for anonymous payments. PIVX is a forked coin of DASH that uses a custom version of the Zerocoin protocol for sending private payments. PIVX users can also run a masternode by depositing 10,000 PIVX in exchange for a masternode that earns them interest and a seat at the governing table.

2. Syscoin

Syscoin utilizes the masternode model for its decentralized marketplace, Block Market, a P2P eCommerce site. Masternodes will facilitate anonymous and instant payments with zero confirmations.

3. Block Net and Exscudo

Beyond privacy transactions for individual transfers and on marketplace services, masternodes functionality can also be applied to DEX. Assets like Block Net utilize masternodes along with their XRouter technology to enable the proper functioning of trading activities on their DEX platform.