Inside Crypto’s Fastest Growing Sector
Masternode 101 & Market Outlook
So what is a masternode?
Technically speaking, a masternode is a server on a network.
Running a masternode requires an initial capital contribution, in the form of purchasing a cryptoasset (token).
“Over the previous four months, the number of masternode projects and the # of active masternodes (across all blockchains) have each increased by over 250%.”
And..why would anyone do this?
In exchange for locking up these tokens and maintaining the masternode, the owner is entitled to ongoing rewards in the form of new tokens.
For the less technically adept crypto investors, income generating cryptoassets are a relatively novel concept. In the light of a bear market for the large cap cryptoassets, we believe income generation is becoming significantly more compelling to investors.
In addition to investor benefits, masternodes provide key support functions for networks to operate and provide features to the end user, like private and near-instantaneous transactions.
Many of the initial hurdles to investing in masternodes (technical expertise, high upfront costs) have been met with innovation such as: 1-Click Masternode Set-Up (GIN Platform) and Pooled Capital Vehicles to gain exposure to masternode projects.
With more masternode projects coming online and more accessibility to a wider audience, we believe the Masternode sub-sector is poised to outperform to the broader crypto market.
This article offers an introduction to blockchains that incorporate masternode (or “staking”) mechanism, why this feature is important for the future of cryptoassets, the current headwinds, and resources to get up to speed.
Note: We sometimes use the terms “staking” & “masternodes” interchangeably. To be clear, masternodes are a form of staking. In this article when we refer to either of these terms we intend for it to encapsulate all cash flow generating cryptoassets.
Table of Contents
- Masternode 101 & Market Outlook
- What are Masternodes?
- What Parties Benefit from Masternodes?
- Trends & Statistics Related to Masternodes
- Investors’ Challenges With Masternodes
- Resources Available to Masternode Investors
What are Masternodes?
A masternode is a server on a network that requires an initial collateral of tokens (or a “stake”) to operate.
In exchange for maintaining a masternode the owner is compensated in the form of newly minted tokens (referred to as block rewards). Masternodes enable a variety of features for different networks, including:
- Facilitation of near instantaneous transactions
- Ability to send private transactions
- Governance — adjudicate and vote on technological and financial developments for the network
- Maintaining a complete ledger of transactions on the blockchain
Who Benefits from Masternodes?
Networks with a staking consensus mechanism typically offer a much higher transaction per second rate (“TPS”) than their counterpart Proof of Work networks. Decreased latency, transaction times and lower fees are all a byproduct of systems that can process higher numbers of TPS.
As the name might imply, masternode systems are networks where token holders are also incentivized to run nodes.
Many of the first generation blockchain networks provide no such incentive. Outside of a select group of miners, running an Ethereum full node is not only technically challenging but can be considered nothing more than a donation, economically speaking.
The sheer size of running a full node on Ethereum (Ethereum’s size surpassing 1TB) means that a very limited group of individuals will even be able to contemplate running a node moving forward.
The term “centralization” gets thrown around quite a bit in the crypto community nowadays. We define this as a select group of individuals (or entities) responsible for the maintenance and decision making of a distributed network.
The importance of maintaining a distributed and robust system of nodes cannot be stressed enough and we feel that masternodes offer an economic incentive, to a broader audience, for one of crypto’s most pressing problems.
Masternodes afford investors the ability to generate passive income. As a byproduct, an investor can lower their average entry point and buffer downside risk. While fantastic in any market, income generation is especially useful in bear markets (such as the one we are currently in).
In 2017, tokens associated with a masternode network returned ~348x, whereas the overall crypto market returned ~38x. This comparison is not entirely shocking given a historic bull market and an earlier stage in the life cycle for masternode projects. While this is an apples to oranges comparison, it does provide perspective on upside scenarios for expected value calculations.
There is no other asset class where 100x+ returns are as readily available as the crypto markets. A savvy investor has the opportunity to take block rewards from owned masternodes and reinvest into additional masternodes.
Protection Against 51% Attacks
A 51% attack on a Proof of Work (PoW) network, like Bitcoin or Monero, occurs when >51% of the hash power on a blockchain is acquired by a single miner. The attacker then exploits this power to generate a profit, either by shorting the underlying asset or creating false double-spend transactions.
51% attacks are much more difficult to execute in a masternode (or Proof of Stake (PoS) system) because they tend to be difficult to exploit economically.
In a masternode network, an attacker would need to acquire a significant % of the masternodes of a network. While not impossible, this is a much more expensive proposition than simply renting hash power for a short period of time.
If a bad actor tried to take down the network he/she would ultimately be crippling the value of the underlying assets they hold in collateral. If you are looking for more information on this topic, there fantastic thread on Reddit: “How does PoS prevent a 51% Attack?”.
Greater Accessibility & Decreased Reliance on Wasteful Practices
The barriers to entry are substantially lower for setting up a masternode than mining a PoW blockchain.
A significant majority of even the most fanatical crypto enthusiasts are unable (or unwilling) to accumulate the necessary resources to mine a PoW blockchain. The barriers to entry, include: expensive and rapidly obsolete hardware, availability of electricity/HVAC & a suitable facility, technical know-how, monitoring software, etc..
We believe many of these same people will be able to participate in the ownership of masternodes. This will offer networks the ability to build infrastructure out from a much wider audience, as well as having a more equitably incentivized community.
The environmental impacts of PoW Mining are typically overstated, especially when you look at the comparative waste of legacy financial institutions and printing money. Yet a migration to staking systems would save a great deal of electricity, especially if future blockchains continue to make the transition from PoW to PoS.
While I do not think either of these factors will be enough to alter the path of projects like Bitcoin or Monero, I do believe that this is a legitimate factor that project developers will need to consider as the industry moves forward.
Trends Impacting Masternodes
A New Model for Funding
There are numerous legal question marks when raising capital via a token sale. They’ve been well documented and debated, yet still no one is quite sure what is actually going on or what the long-term implications of such capital raises are.
After years of speculation, we finally received a decision from the SEC on Ethereum. From a legal perspective it does appear that the judgement is a bit misguided and there is a significant possibility the judgement will be subject to ongoing review.
The public token sale or ICO (Initial Coin Offering) craze of 2016 & 2017 was funded largely by retail investors, with little to no restrictions on geography, investor accreditation or any KYC/AML exercises. Basically anyone with Ether was able to partake in an ICO.
In Late-2017 there was a significant shift in this model, which has now been replaced with institutional investors only (Angel Syndicates, VC Funds, Whales, etc). Due to legal and regulatory fears, many projects choose to exclude US investors all together.
The problem with this shift is that the networks around these tokens still need to be grown organically. This cannot occur with the proceeds from a token sale alone.
Adding to this conundrum, many potential early-adopters of the network will look elsewhere because they cannot partake in the financial upside.
Networks work better when all parties are incentivized. When a user has a vested interest in the platform he/she will naturally be more likely to tell others about it. The mental bandwidth, connections and support of early users are crucial to building up the value of any network (and its’ token).
We foresee, and welcome, a more community based funding model, as opposed to Silicon Valley ICO model of enormous pre-sale allocations and discounts to institutional investors.
Networks in this industry will have the best chance for success when teams are able to deliver a working product and then rely on community support to organically expand their network.
Ultimately the community should build & accrue the value of the network.
Running a masternode requires collateral to be locked, reducing the circulating supply of that token available on the open market.
Due to the ongoing incentive of running masternodes to earn block rewards, investors are more likely to hold onto their tokens.
This, in theory, provides more price stability, which is important in a volatile asset class. Additionally, this structure is more likely to attract long-term investors rather than pump and dump groups.
Investors’ Challenges With Masternodes
Upfront capital is required to purchase the collateral necessary to operate any masternode. Projects that appreciate in value will inevitably price some market participants out of consideration.
In the future we foresee many more organized capital vehicles to help facilite fractional or shared ownership in masternodes.
We have yet to find a shared masternode solution that we are ready to endorse to others. However there is a strong pipeline of top-tier projects working toward appropriate solutions (GIN Platform & MANO).
Technical Skills Required
Technical knowledge is necessary to set-up and maintain masternodes.
Guides exist that lay out the process of setting up a masternode. But an individual still needs familiarity with programmatic language, linux commands, virtual servers, crypto wallets, exchanges, etc.
Further complicating this issue, the core product of many masternode networks are often difficult to use. Their wallets can be quite buggy, inaccessible technical support, etc.
For these reasons, the emergence of one-click masternode platforms will be a game changer for the sector. GIN & MANO are emerging platforms in this space:
Liquidity & Order Books
Outside of the handful of $50m+ market cap masternode coins, when seeking to acquire the tokens for a masternode, you will likely find yourself on an exchange like Cryptobridge or Cryptopia where order books can be quite thin.
Tokens with a tight supply are routinely bid up or down 50%+ in a day. This is not an exercise for the faint of heart and we encourage you to trade with small increments when you first start out, and as always DYOR.
Masternodes, while still in an elementary stage of experimentation, have shown serious potential to expedite distributive consensus and achieve a more democratized decision making process within blockchain communities.
In addition to providing a more efficient mechanism to maintain distributed networks, masternodes provide investors with passive income.
We believe that the triple digit growth in the number of active masternodes represent the early-stages of a greatery growth trajectory.
Scaleable networks, income generating assets and a post-hype ICO bubble all point to masternodes making up the fabric of many of the top blockchain networks of the future.
Resources to Learn More About Masternodes
Research & Analytics
Masternodes.live — ROI, Supply & Key Data on Projects. Track MN rewards.
Masternodes.online — General Trends for MN projects, reward stats.
Bitcointalk — Best place to start research on any project.
Telegram — Free flowing conversation in token-specific channels.
Discord — In depth project research. More structured than Telegram.
Influencers & Media
Cliff on Crypto — Top Commentator on Masternode Projects. All content is non-sponsored (rare in this industry)!!!
Gin Platform — One Click Masternode Set-Up & Hosting.
Apollon — Similar to GIN, main platform launch Q3 2018.
MANO — One-Click Service launches in July. Shared MN in August. Exchange in January 2019.
Sublime Text — Text Editor to Help With Set-Up of MNs.
Simplest Guide to Setting Up Masternodes — Written by Panama Crypto.
VPS Hosting — Virtual Private Server (“VPS”) Hosting.
Binance — Top crypto exchange in terms of volume.
Cryptopia — Mid-tier MN tokens (by volume & market cap) likely found here.
Cryptobridge — Micro-cap (by volume & market cap) MN tokens are found here. Generally traded here prior to listing on Cryptopia.
Bittrex — Top crypto exchange, security always been top priority.
About Blockstake & How to Reach Out
Thomas McLaughlin is a founder and CEO of Blockstake. Tom boasts 3+ years experience investing and trading cryptoassets, and serves as an executive board member of the Blockchain Compliance Foundation. Previously, Tom was an investment banker in the Leveraged Finance Group at Bank of America Merrill Lynch. You can connect with him on Twitter @tmcg89.
This is the first in a series of educational editorials related to investing in masternodes. Some of the topics we intend to explore include:
- Masternode Projects: The Ones You Need to Know
- Investing in Masternodes: Valuation, Inflation & Other Key Metrics
- The Future of Consensus Mechanisms
If you have any suggestions of topics you would like covered, please tweet @Blockstake.
Note: Although we discuss the market for masternodes and the potential for outsized returns, any and all material provided herein is intended to be for educational purposes only and is not investment advice. Blockstake may hold economic interest(s) in any project(s) mentioned in this post and is not required to provide public disclosure.