Staking vs Masternodes

Crypto ROI
9 min readDec 19, 2018

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Difference between Masternodes & Proof of Stake

Masternodes and Staking while usually implemented together, are actually completely separate consensus mechanisms. Just like Scrypt mining on Litecoin is different than SHA 256 mining on Bitcoin. They both accomplish distributed consensus via locking of “stake” ,which acts like collateral that they will not attack the network, and get rewards for verifying transactions. So while that is the same, their functions are still significantly different.

Staking and Masternodes: This article will answer the frequently asked questions like,

  • How can it provide passive income?
  • Are you simply paid interest for your investment?
  • How does the system work?
  • What are the differences between the systems?
  • Is there more to this system than just simply providing interest?
  • How does it benefit the network?
  • Why?

Pros and cons will be provided to help you decide which one you’d prefer to use. For the sake of those who don’t know, let’s start with the Blockchain technology.

What is the Blockchain Technology?

The Blockchain Technology can be used for anything of value. Anything of value can be traded for another. The capability of an asset to be traded through the internet adds value to any asset because it way more faster and more convenient. This also means that your asset being accessible online needs to have a very reliable security to protect from any malicious attacks.

This is the true innovation behind blockchains. Whether you understand how they work or not, the important thing is that they achieve consensus even in adversarial conditions. Major crytpocurrencies like Bitcoin, are so secure even governments would have a tough time breaking or changing consensus.

And because they work regardless if people are attacking them or not, it makes them a secure place to store information, value, money, data, or anything else online. Just like the internet itself, you don’t need to know how it works to use it.

Blockchain consensus mechanisms:

An algorithm is a set of rules to be followed in calculations or other problem-solving operations, especially by a computer that verifies transactions on the blockchain to establish a consensus(a general agreement).There are a lot of consensus mechanisms and each one is slightly different from the rest. There are also hybrids or a combination of other mechanisms.

Here are some of the common mechanisms.

This article, however, will only be able to tackle the difference/s between Proof of Service (PoSe) and Proof of Stake (PoS).

(PoS) Proof of Stake and (PoSe) Proof of Service

What’s the difference?

Before we can even start comparing the two, we have to talk a little bit about the Blockchain’s first ever consensus algorithm which is what Bitcoin uses, the (PoW) Proof of Work. ( You can skip this part if you already know what PoW is and how it works. )

What is (PoW) Proof of Work?

(PoW) Proof of Work is a consensus algorithm that;

  1. assigns nodes/computers to,
  2. verify/validate transactions,
  3. creates blocks.
  4. Makes new coins to reward or pay the nodes and
  5. distributes them accordingly.

The Blockchain is a chain of blocks that consists of a copy of all the previous transactions used for verifying the current set of transactions that made within a 10 min period. The more transactions done within a 10 min period, the more difficult it gets for a block to get verified. This means that verifying a block needs a lot of computing power or work. Rewards are given to the nodes/computers that participates in verifying the transactions / a block.

These rewards are the incentive for miners POS, POW, or POSe to secure the network. They act as a form of inflation until transaction fees are enough to sustain the network.

This whole process, where participating or being a part of the network that computes to validate a block of transactions for the reward is also known as mining.

The chance for someone to participate in solving the block will most likely be given to whoever can produce the most computing power. (PoW) Proof of Work is more well known compared to other consensus algorithms. As the pioneer this is used by some well known coins such as Bitcoin, Ethereum, Litecoin and Monero.

Which was great, however, the need for a lot of computing power is making electricity bills shoot up “to the moon”. It’s so high up that this downside was at a point where electric bill costs more than the rewards you get. Making it unprofitable and unbearable for miners to mine and to balance this out transaction fees also went “to the moon”.

Other consensus algorithms were made to solve these issues.

What is (PoS) Proof of Stake?

(PoS) Proof of Stake is also a consensus algorithm with functions similar to (PoW) Proof of Work. Like it,

  1. Determines and assigns nodes/computers to,
  2. verify/validate transactions,
  3. makes blocks by bundling all transactions made in a 10 minute interval.
  4. Creates new coins to reward or pay the nodes and
  5. distributes them accordingly.

Some coins are using PoW for creating new coins(number 4) and uses PoS for the rest. The first coin to do this is Peercoin. However in situations like these wherein the maximum supply has been reached / the number of coins that can be created has been created, it means that rewards can no longer be from the creation of new coins anymore. Instead, rewards come from the transaction fees.

How does (PoS) Proof of Stake work?

So how does (PoS) Proof of Stake work and determines the winners to receive the rewards for staking their own coins? Unlike PoW that uses work as proof to validate/verify a transaction that consumes a lot of energy, PoS solved this issue by removing the factor that burns a lot power which is work. Instead PoS uses the coins themselves, staked by the whoever owns the coins.

If you own a coin and you want to gain interest through a passive income, then the risk is staking your own coins to be used in verifying the new transactions. This means holding or your coins in a wallet connected to the network and the wallet has to be unlocked/unencrypted the whole time because the validation process needs the data in your wallet, like, the number of coins, to determine if the new transactions are correct.

This also means that the more the number of coins you have the more reliable the data you have ergo, te more likely or the higher the chances that your node gets for winning. Due to the nature of this model, it does not have a lower limit to how much coins you have to stake in order to be a part of the network. Let’s go ahead and see how Masternodes differ from PoS. And how this difference benefits the users or the nodes include in the network.

What is (PoSe) Proof of Service — Masternodes?

The main reason why I had to make an article to compare Masternodes and Staking is because a lot of beginners in the cryptosphere tend to think that these two are the same. No, they are not the same. Although, the work they both do are somewhat similar. And the only thing that they have in common is that they’re both a way to earn passive income.

Masternodes were 1st introduced by Dash. What it does is, it adds another security system to protect the network. Mostly because of PoS having the need to slightly compromise the security to solve the issues encountered from using PoW. Unlike PoW and PoS, Masternodes being like more of an addon, cannot stand on its own. Simply because it was not made to create and support a new block by itself.

Masternodes are incapable of creating new blocks, but are capable of verifying transactions. This is the main difference between the 2 to keep in mind.

Masternodes are incapable of creating new blocks, but are capable of verifying transactions. Reason for it to still be categorised as a consensus algorithm. Due to its focus on securing the network, it has the power to reject blocks that might cause harm to the network.

Clearly, masternodes offer way more services than just providing security. Therefore, it was categorised as a Proof of Service or Commitment and thus show how different is it then staking.

Holding in Masternodes also brings with it, the power to,

  • Hosting and maintaining an entire blockchain.

These new extra services unlocks +more privileges and features such as,

  • Governance and voting rights.
  • Instant transactions (InstantSend).
  • Private transactions (PrivateSend).

How does (PoSe) Proof of Service — Masternodes work?

Users that holds their coins in a Masternode, get a 45% share of the block reward. The other 45% goes to the users that holds coins in a network that is shared together with a Masternode and PoW miners i.e DASH, or PoS stakers i.e PIVX, or with both PoW and PoS i.e LuxCoin. 10% of the block reward are for the blockchain’s treasury fund. The voting right you have is for the 10% fund allocation managed by operators.

Unlike PoS, in PoSe — Masternode there is a substantial requisite amount needed in order to run a full node / masternode. Let’s use DASH for an example. In order to have a running masternode, you’d need 1000 DASH coins, which is at this time, is a whopping $68,000.00.

On top of this, just by simply having the money ready for the requisite amount won’t be enough to get the masternode to operate. Other conditions should also be met like if, the currency is moved from its staking position, can cause a masternode to cease operation.

It also has to run online all the time which requires a VPS (Virtual Private Server) **note: no VPN, but a server..

Proof of Stake + Masternodes

Because of their similar nature and complementary features, Proof of Stake and Masternodes are often combined to create a robust consensus mechanism with some included governance. Every user can stake, securing the network and producing blocks. But those that are heavily invested and lock up a significant amount of coins are further rewarded with masternode rewards and usually some governance voting weight. In the future I predict you will see a lot more forks of PIVX type consensus structures with POS minging + Masternodes.

Summary

  1. Staking and masternodes are similar but different
  2. They both are blockchain technologies
  3. Blockchains create secure ledgers on the internet full of attackers
  4. POW is a common consensus mechanism, but burns a lot of electricity
  5. All consensus mechanisms have rewards they distribute to those who secure networks
  6. Participating in securing the network for the rewards is an economic activity called mining
  7. Proof of Stake is a energy efficient alternative to Proof of Work
  8. Proof of Stake works through incentives and collateral “stake” rather than burning electricity to secure network.
  9. Staking in POS systems is a good form of passive income, as little is required to earn staking rewards.
  10. Proof of Service POSe often referred to as masternodes is a verification and governance mechanisms usually combined with POS or POW
  11. Masternoes require significant amount of Stake in return for the extra voting and verification rights. Masternodes receive an extra reward for providing this service
  12. POSe often requires extra resources and setting up of a VPS

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