Everything you ever wanted to know about masternodes

If you’ve been involved with cryptocurrency for a while, you’re probably heard of masternodes, which are an integral part of popular cryptocoin networks such as Dash. Being aware of the existence of masternodes is one thing however; understanding what they do and why they’re so important is quite another. The following guide will provide a primer on everything you need to know about masternodes, and why you might want to set one up.

What is a masternode?

The technical definition of a node is “An active electronic device that is attached to a network, and is capable of creating, receiving, or transmitting information over a communications channel.” That may be accurate, but it’s not very helpful when it comes to understanding the concept of what a node actually does.

The best way to demonstrate what a node – or more specifically a masternode – does is to consider one in action. On the Dash network, the blockchain is secured and transactions are verified using a Proof of Work (PoW) consensus mechanism – by miners in other words. But the means by which Dash secures its network don’t end there. Unlike bitcoin, which is PoW only, Dash also operates a second tier of security via a series of full nodes, aka masternodes. These perform a number of key functions such as enabling private transactions and facilitating a decentralized governance model (each node operator is entitled to vote on key consensus decisions).

To use an analogy, Dash miners can be thought of as the prison guards within the jail, tasked with ensuring that everything is in order and that the prisoners are where they’re supposed to be. Masternode operators are the guards posted in sentry towers on the perimeter. They’re watching everything – the prisoners and the prison guards – to ensure that the facility is in order and no one attempts to escape.

Dash is by no means the only cryptocurrency to use masternodes incidentally, even if it is the best known example. ZenCash, a privacy-oriented coin, also makes use of masternodes to secure its network. Known as SecureNodes, in the case of ZenCash, these provide their operators with a reward for their troubles.

How masternodes work

One of the defining characteristics of a node is that it is able to communicate with other computers on the same network. If you’re wondering what the difference between a node and a masternode is, incidentally, the answer is basically “permissions”. Masternodes have more privileges and their operators have greater responsibility. With the Dash network, for instance, regular nodes take care of mining, while masternodes control enhanced functions such as private transactions.

A masternode is essentially a computer server that has been configured to suit the requirements of the cryptocurrency network it is protecting. The longer an operator runs a masternode, the greater the yield they can be expected to make in the form of cryptocurrency. Masternode operation is generally seen as a more sustainable means of earning cryptocurrency than trading, which is inherently more volatile. By purchasing enough of a coin to place the required collateral and then setting up a masternode, an operator can rely on a passive income throughout the year.

Who can operate a masternode?

In theory anyone can operate a masternode, although in practice there are certain requirements to run one. For one thing, a degree of technical knowledge is necessary. Maintaining a masternode is relatively straightforward, though familiarity with networks will be essential. You’ll also need the hardware to run a masternode, plus a certain amount of cryptocurrency as collateral.

To run a Dash node, at least 1,000 Dash are required, and the operator must be capable of running a node for a minimum of 23 hours a day without a loss of connection. Given that 1,000 Dash are worth more than one million dollars, setting up a Dash masternode is now beyond the means of most individuals. As a consequence, Dash nodes are typically run by long-term believers in the project, who acquired Dash when the cryptocurrency was significantly cheaper.

Are masternodes profitable?

Most masternode operators are involved with the cryptocurrency because they are long-term believers in the project. They are emotionally invested, as much as they are financially invested, in other words. Nevertheless, they are not providing their computing hardware and bandwith for free. Operating a masternode has its costs, but these are offset by rewards which are taken from a portion of the transaction fees for sending the cryptocurrency. In 2016, for example, Dash masternode operators earned a return of around 11% on the 1,000 Dash minimum that they had as collateral.

Most cryptocurrencies won’t reward their node operators quite so handsomely in dollar terms; as the largest masternode-based cryptocurrency by market cap, Dash is way out in front. There are plenty of other altcoins however that have lower financial entry requirements to run a masternode, and which offer a similar percentage payout to Dash; around 10% per year seems to be the norm. Coins that run masternodes as part of their consensus mechanism include NEM, PIVX, and MonetaryUnit (MUE).

Masternode pros and cons

The biggest drawbacks to running a masternode are the setup costs. The easiest entry route is to elect for a cheap coin, despite the fact that its rewards will be equally cheap, and hope that its value will rise as the network matures. Most individuals will be priced out of being able to set up a Dash masternode today for instance. Alternatives, such as ZenCash, may be more attractive; its network currently has over 4,000 masternodes in place to secure its private transactions and encrypted messaging system.

The benefits of operating a masternode come from the tangible reward that are earned coupled with the intangible rewards of knowing that your involvement is helping to secure the network and reinforce the cryptocurrency’s underlying infrastructure. If you’re interested in getting a masternode, check out the detailed guide on the Dash website to learn how to proceed. Similar guides can be found for PIVX, NEM and ZenCash. If there’s a cryptocurrency project you passionately believe in and would like to support, consider setting up a masternode. The energy consumption costs are significantly lower than cryptocurrency mining, and the long-term rewards can make it all worthwhile.