What are Masternodes?
Masternodes (MN) are unique advanced nodes created in 2014 by Evan Duffield and a team of developers as part of the features of the cryptocurrency company – Dash. They are links that comprise part of a network of blockchain without any central control, entrusted, by their strength and computational power, to perform higher mining functions and reap higher rewards in return. They run on a dedicated X11 algorithm, an upgrade from the SHA-256 used by predecessor cryptocurrencies like Bitcoin and Ethereum. They also serve as significant points synchronized into the entire blockchain structure. In addition, they help operators perform unique functions such as masking the identity encryption of transactions on the network, facilitating consistently rapid transfers and exchanges, storing vast amounts of cryptographic data and maintaining the overall firewall security of the network to which it belongs, amongst others.
Given that the central idea of every serious cryptocurrency coin exchange is “decentralization”, masternodes are open, free, and can be owned by virtually anyone with the dedication, focus, and financial strength to bear the set-up and investment costs.
Basic Requirements for Setting up Masternodes.
These costs vary depending on the specific requirements of the coin so chosen for investment. Some cryptocurrency coins which utilize the masternode framework require a stipulated minimum amount of coins, say 1000, 5,000, or 10,000 coins, to be purchased and deposited long-term, untouched by the owner of the masternode as a commitment to the investment. Regardlessof the choice of coin investment, there are a few basic requirements that are must-haves, across all coin choices. They include :
- A computer system with advanced calculative proficiency (preferably Linux or Ubuntu operating systems),
- A stable virtual private server (VPS) armed with the ability to conveniently and consistently host the masternode wallet for 24 hours a day, 7 days a week non-stop;
- Large amounts of space for storage to accommodate the entire contents of the blockchain and a dedicated internet protocol (IP) address that ensures the owner of the masternode remains accessible to other nodes and masternodes in the network.
A masternode would also require a fair knowledge of computer programming and the functions and general structure of blockchain networks.
Some Benefits of setting up Masternodes
As a means of compensation for its heavy investment and set-up costs, the successful management of a masternode is designed to be an equally rewarding process.
- Since it serves as a valuable and influential node of support that contributes an appreciable amount of effort to ensure rapid and smooth transactions safely and securely, the stipulated reward is set up to be reasonably higher than what is accrued to regular nodes on the network.
- The common source of masternode gain is from a certain fixed percentage determined by the coin developers, which goes to it for every completed transaction facilitated through its network of commands.
- This form of income is passive in nature and the volume or frequency depends on the strength and the growth of nodes in the blockchain. Simply put, the larger the nodes to a blockchain, the higher the transactions made and the higher the reward for a masternode.
- Still, that is not all. A bigger benefit is the possibility of value appreciation of those initial large volumes of coins staked to qualify as a masternode holder. Statistics have seen such increases skyrocket to well over 300% to 700% appreciation over time.
However, these great benefits are solely dependent on the popularity and public acceptance of the coins and the seriousness of the developers. Hence, the need to take great care in choosing which cryptocurrency coin to invest in as a masternode holder.
For clarity, a single masternode is not all there is that is needed to get a blockchain-based network up and running. Every masternode is unique in its identity and comprises nodes that are entirely under its cryptographic jurisdiction. The nodes, in this case, are simply any type of device with computational power that possesses the ability to host and maintain a network and can send, receive or contribute to keeping specific parts of records of digital data in a blockchain. In terms of structure, connectivity, and operations, the entire blockchain system containing masternodes can simply be likened to neurons in the human nervous system, which comprise a cell body that receives signals from the dendrite and sends them out through the axon. The masternode plays a role similar to the cell body or soma and is connected to many other masternodes through smaller nodes, just like the axon in the neuron system. The role of the masternode is administrative. It helps validate proposals and improve the entire system and other functions such as facilitating rapid transactions and encrypting anonymous ones.
Other Types of Mining
Masternodes are structurally different from other types of mining. While masternodes may be currently regarded by newbie’s as the most current or most popular means of mining, they are not necessarily a type of mining in the real sense of the word as they are incapable of adding new blocks to the blockchain ledger and only do the work of verification. This is because traditional cryptocurrency mining engages the service of several powerful and rapid computers to compete and decipher and also solve cryptographic issues. The solution is what gives birth to a new block which is then added to the existing blockchain network and crypto coins given to the provider of the solution as a reward. This technology is hinged on a predetermined consensus known as Proof of Work (PoW) which is a joint validation bestowed on the solution provided by a member or group of members of the mining block to a certain cryptographic problem. Proof-of-Work equally performs the task of assigning random computers the task of validating an interconnection of transactions that enables the creation of such new blocks. Pioneer cryptocurrencies like Bitcoin, Litecoin, and Ethereum utilize this form of mining.
Another popular energy-efficient means of mining similar to the PoW is the Proof of Stake (PoS). Unlike the PoW, PoS is another consensus structure that enables miners to participate in mining the next block by way of the various randomized selection process without the intense and difficult computational requirement. The PoS uses mechanisms like the amount of wealth, the volume of stake, and the holding period to determine the participants in the next block. Participants in a Proof-of-Stake network are required to hold a large number of coins and leave them unencrypted for the period it takes to conduct the validation exercise. This process, however, is being criticized by many dissuaded coin holders as an evident point of vulnerability for large coin owners.
Why Masternodes Looks Better
Masternodes cover this gap as they provide an extra layer of security by checkmating and scrutinizing new blocks to determine their level of threat or benefit to the network. They are similar to the Proof-of-work and the proof-of-stake method of mining in the sense that they all allocate certain rewards to certain participants from every successfully solved block in the blockchain. It also shares certain unique features with the Point of Stake as they both encourage the holding of large volumes of coins for a long period to be able to qualify for block benefits.
The big difference with masternodes is that they are equipped with the power to become administrators over a blockchain and are accorded special franchise rights as regards the working and future decision of the network. Another equally significant difference is the fact that there is no need to purchase expensive cooling systems or high-end energy-consuming, technology-intensive crypto-mining gears and software facilitated by GPUs or ASIC chips as there is with the proof-of-work mechanism. In the area of storage, vast amounts of storage space (to the tune of over 250 gigabytes in the case of Bitcoin) are usually needed to store a single node and add it to the blockchain. This means a lot in the twenty-first century, given the growing concerns over global warming and the need to reduce global energy consumption, which masternode considers compared to regular mining. Furthermore, there have been several reports of cases where the cost of energy expended trumps whatever gain is accrued from successful mining, leaving the miners with a deficit and shooting up transaction costs as a stopgap solution. The mechanisms of the PoW based project can also be structured to accommodate masternodes, but the reverse is practically impossible for now.
The First Platform to Use Masternodes
Digital cash, abbreviated as Dash ($DASH), is the altcoin (all cryptocurrencies other than Bitcoin) credited to have pioneered the use of masternodes. The project, which was an improved version of a forked out code from an already existing Litecoin cryptocurrency, was introduced by Evan Duffield in 2014 through a system dubbed Proof-of-Service. This was a feature to help prioritize privacy (PrivateSend), ensure sustainable decentralization, and provide rapid transaction exchanges (InstantSend) – something that appeared lacking in Bitcoin. It was initially plagued with catastrophic hyperinflation from Venezuela – a nation where most of its users come from, which saw the nation’s local currency value-Petro- plummet down over 150,000%. Dash eventually bounced back, outdoing the Petro in value and became a haven for protection of local currencies against such future volatility. The cryptocurrency has become fully decentralized and self-sufficient through a Decentralized Autonomous Organization (DAO) system. This eliminates the price inflation that comes with transaction intermediaries and creating a system that financially rewards the original developers who spent their valuable time contributing to making the network safe, secure and attack-proof. A minimum stake of 1,000 DASH coins is required as one of the basics to becoming a certified masternode holder. It takes within a range of approximately 150 – 170 seconds to mine a coin. In other to incentivize people to take up the task of owning masternodes, Dash offers irresistible benefits such as:
Exclusive participation in the governance decisions of the coin community
Passive income as a percentage from every transaction completed
Prospects of value appreciation for the bulk of coins being held by the masternode owner
Their success helped fertilize the ground for the spring up of a couple of other masternode-based altcoins like PIVX, which is structured as an open-source cryptocurrency platform, Syscoin, and Exscudo. This is primarily a fin-tech project bridging the gap between centralized brick and mortar financial institutions and online networks with a decentralized structure. Others are KZCash (KZC) Bitcoin Lightning (BLTG), NERO (NERO), Masternodecoin (MTNC) amongst others.
Masternodes: Hot or Cold Wallets?
There are two ways to set up a masternode: either using a hot wallet or a cold wallet. Hot wallets are set up with all the prerequisite processes mentioned earlier but with smaller amounts of coins for primarily frequent uses. However, with a hot wallet set-up, users run the risk of vulnerability to various forms of external attacks. On the other hand, the cold wallet set-up is relatively safe and secure, seeing that it has a two-way structure that requires the provision of two wallets, combining the function of a day-to-day transaction with a secure long-term holding. While the Linux server is most preferable, others also make use of the Ubuntu server given their lightweight, fast and responsive build. This means that a basic knowledge of any of both chosen servers is necessary to set up a masternode.
In the event that a masternode holder decides to pull out, they run no risk of losing their collateral investment as it becomes once again accessible to them for hold or resale. The benefit to this is the possibility of an appreciation in value over time that would mean more profit from the sale of the collateral coins. This underspells such forms of investment as high risk in the short run and low risk in the medium to long run, seeing that it puts the dormant tokens invested as collateral to work with prospects of daily benefits from work and bulk benefits upon retirement and cash out.
Gaining From Becoming A Masternode Holder
A few advantages to the masternode are the great relief that comes with anonymity in facilitating, approving, and conducting transactions and a guaranteed level of security courtesy of a security system based on an X11 algorithm. Added to that is the rapid nature of transfers that eliminates traditional validation and verification bottlenecks. Masternode mechanism is noted for a relatively faster and less energy-intense new block generation compared to Bitcoin. Lastly, the provision of huge benefits for a massive 45% block mining benefit reward for holders of the masternodes is another added advantage to considering masternode mining as an investment.
Outside the internal benefits of the masternode system, it also helps to wade off the tendency for the network to tilt towards centralization by sustaining a level of privately held secondary servers to keep the chain secure. This is also strengthened by the network of scrutiny, checks, and balances that ensures only a collectively validated new set of blocks is admitted into the system. The voting rights accorded to every holder of a masternodes provide them with an opportunity to influence the price and availability of the coins in circulation to their benefit. While some express concerns on the necessity of a minimum coin stake for approval of the role of a masternode owner as a subtle indication of elitist centralization, others believe that the benefits trump the risks as they serve as incentives and motivation for the user to remain honest and committed to the overall progress of the system. Even a 51% sabotage effort by a masternode operator – though possible – remains at large, realistically unattainable given the huge financial effort required to build a network of such sabotage army which may eventually turn out counterproductive in terms of risk-reward ratio.
However, it must be stated that they also require huge financial capital both in coin collateral cost, station set-up cost, recurring energy, and uninterrupted connectivity costs. Strong technical knowledge of general blockchain working and dedicated amount of time towards supervision and other maintenance
The Future for Masternodes
Going forward, the future may see a combination of both Proof-of-Stake and Masternodes as a means to create an efficient and sustainable consensus mechanism. This combination is already known as Proof-of-Service. The masternode feature would bring the benefit of power and seat in the governance of the network through a significant amount of long-term coin collateral stock holding, and other users can earn profit from staking their coins without necessarily setting up dedicated servers and accessible IP addresses as in PoS. At this point, there is some form of decentralized categorization that sees a certain level of benefit accrued to different participants following the different levels to which they belong.
The abbreviation –MN – is added to any coin that operates using a masternode system for easy identification. Currently, some of the top best-performing masternode coins according to masternodes.com are Dash (DASH MN) at $280.46777, Pivx (PIVX MN) at $1.9901, Chaincoin (CHC MN) at $0.33906, Smartcash (SMART MN) at $0.021, Syscoin (SYS MN) at $0.40856, Zcoin (XZC MN) at $4.96985, Phore (PHORE MN) at $0.45982, Stakenet (XSN MN) at $0.44183, Bulwark (BWK MN) at $0.10430 and Blocknet (BLOCK MN) at $3.30137.