Masternodes 101: A Beginner’s Guide
What is a Masternode? Historical Background
Masternodes were originally implemented by the DASH protocol in 2014 as a response to the need for self-sustaining, stable full node infrastructure. DASH identified a weakness in Bitcoin’s design where non-mining full nodes were not compensated for maintaining validation and propagation of the current ledger.
DASH identified a sizeable decline in full nodes as Bitcoin transactions increased. This trend has since reversed, however the systematic vulnerability with the Bitcoin protocol implementation remains.
Masternodes, also known as Supernodes are full nodes that act as distributed servers on P2P Blockchain networks. They are compensated from a block reward for storing, validating and sharing the Blockchain while also providing higher tier services like privacy-oriented coin mixing, instant transactions and executing voting rights over allocation of treasury capital. Financial compensation to masternodes for these core functions and services strengthen the virtual corporation (DASH) and incentivises distributed decision making.
An important distinction to make is that masternodes do not necessarily mean Proof of Stake (PoS) and vice versa. The DASH masternode implementation has a minimum requirement of 1000 DASH and has a block reward split 45% to miners, 45% to masternodes and 10% to the treasury. This protocol involves a mined Proof of Work (PoW) hash that is validated by a pool of masternodes using a deterministic algorithm. The validated block is then broadcast to the entire DASH network. You can think of masternodes as another tier of infrastructure that aims to address the problem outlined with Bitcoins’s non compensated non-mining full nodes.
PIVX, a fork of the DASH protocol has a masternode implementation built on a PoS consensus algorithm. Masternodes in PIVX cost 10,000 PIVX and provide services as outlined above, however they share the block reward with staking nodes (staked coins under 10,000 PIVX). In PIVX block reward is split with 10% to treasury, 90% dedicated to masternodes and staking nodes.
What differentiates PIVX from DASH is the block reward. PIVX is split between masternodes and staking nodes dynamically. This is achieved through the “See-Saw Reward Balance System”. This mechanism is simple, as the masternode count increases the more will be paid out to staking nodes. Conversely, as the masternode count falls masternode reward allocation increases and staking node reward decreases. This ensures a state of equilibrium is reached and provides long term stability and incentives for larger and smaller actors.
The key point to remember with masternode implementations is self-sustaining, stable infrastructure.
Why Masternodes? Decentralized passive income generation.
Masternodes present a great opportunity for passive income generation. They require substantially less hardware than PoW mining and have lower electricity and ongoing maintenance costs. Masternodes can be run on your desktop computer or on standalone hardware like Raspberry Pi. When assessing the viability of a masternode look strongly at two indicators; the use case of the coin and the YoY % return. The use case here is the most critical indicator because it is not worth hodling a coin that does not have a strong market fit.
To stress the importance of use case let me bring attention to the how masternode return on investment (ROI) broadly works. ROI increases as transactions on the network scale and decrease as more masternodes come online (competition). However if the coin has a genuine use case other than just locking up masternodes this will create alternative demand and accelerate price appreciation. If you discount the importance of use case you will fall victim to opportunity cost (the cost over time of where else your money could have been). YoY % returns differ considerably, it is important to take note because this will represent annual payout in coins, not including payment for other services you may provide such as coin mixing. Often this is baked into the protocol and is not dynamic or adjustable.
Masternodes often have hard and soft limits. A hard limit represents the total amount of masternodes that can be created from the circulating supply. Currently with DASH this hard limit is 8,023 masternodes; 8,023,313 DASH (circulating supply) divided by 1,000 DASH (masternode requirement). A soft limit represents the acquisition price of a masternode (which increases as more people lock away coins and create masternodes). This also subsequently limits liquidity on exchanges.
How to calculate a Masternode’s daily payout.
Payments for a standard day of running a masternode can be calculated using the following formula
(n/t)*r*b*a
Where
n = total number of masternodes an operator controls.
t = the total number of masternodes on the network
r = the current block reward
b = blocks in an average day
a = average masternode payment (%)
DASH & PIVX ROI — 22/4/2018
DASH — Daily Payments & annual ROI
DASH has a 1000 coin requirement
Daily Payment
(n/t)*r*b*a
Where n = 1 masternode
t = 4,758 masternodes on the network
r = 3.36 DASH
b = 548 blocks
a =45% of the block reward or 0.45
= (1/4758)*3.36*548*0.45
= 0.17 DASH per day for running 1 masternode on the DASH network.
= $75.40 USD per day.
Annual ROI(%)
((n/t)*r*b*a*365)/1000
= ((1/4758)*3.36*548*0.45*365)/1000 DASH
= 6.3% annual ROI
PIVX — Daily payments & annual ROI
PIVX has a 10,000 coin requirement.
Daily Payment
(n/t)*r*b*a
Where n = 1 masternode
t = 2,105 masternodes on the network
r = 5 PIVX
b = 1,437 blocks
a = 45% of block reward or 0.45
= (1/2105)*5*1437*0.45
= 1.54 PIVX per day for running 1 masternode on the PIVX network.
= $8.25 USD per day.
Annual ROI(%)
((n/t)*r*b*a*365)/10,000 PIVX
= 5.8% annual ROI
This is a great site to find this data quickly — https://masternodes.online/
References
http://dashmasternode.org/what-is-a-masternode/
https://blockonomi.com/masternode-guide/
https://coinsutra.com/masternodes/
https://www.youtube.com/watch?time_continue=106&v=FY1mciGGhO4
https://www.investitin.com/masternode-list/
https://medium.com/chain-intelligence/masternodes-an-introduction-ce1021416bee
