Masternodes — yet another hot buzzword one is bound to see when researching cryptocurrency projects or blockchain tech — have become increasingly popular, with many projects utilizing them. However, there are different kinds of masternodes, each with different reasons for them to be implemented in a blockchain.
So what are they? Well, before we dive into that — let's start out with what they are not.
Masternodes vs. Proof of Stake
This seems to be a common point of confusion when it comes to masternodes, as both masternodes and Proof-of-Stake systems share one distinct similarity, in that they both provide passive income by holding onto crypto. However, there are some important fundamental differences.
Most notably, Proof-of-Stake (PoS) is actually a consensus mechanism that propagates new blocks to be added to a blockchain — much in the same way that Proof-of-Work (PoW) mining does. And, just as having more mining power, or “hashrate” gives a miner more chances at ‘mining’ a block on a PoW blockchain, on a Proof-of-Stake chain the more coins held the better chance one has of staking or ‘minting’ a block. Both systems reward miners/stakers by allocating a percentage of the block reward to them. This percentage of the block reward varies from project to project.
Masternodes on the other hand, do not play a role in the propagation of new blocks. They are not a consensus mechanism in and of themselves, such as PoW or PoS. However, they can enforce special rules/security features that reject blocks or otherwise help with consensus.
In a nutshell — a masternode requires one to “lock up” a predetermined (usually sizable) amount of coins as collateral in a special wallet, that is also running as a full node on the network that remains online 24/7.
Similar to PoW and PoS however, a percentage of each block reward is split evenly and rewarded to all masternode operators.
So, what makes these nodes so special that they warrant rewarding the operator for maintaining a node?
How Masternodes Help a Blockchain Network
If you are not familiar with what a node is, you can read more about them here. To briefly review — (most) blockchains exist as decentralized, peer-to-peer networks of computers, or “nodes”, that each store a copy of the entire blockchain. Nodes constantly ‘talk’ to each other over the network to broadcast and validate transactions, as well as enforce the consensus rules that ultimately determine if the current version of the blockchain is indeed the correct one at any given time.
These nodes are referred to as “full nodes” — in that they each keep a full and up-to-date copy of the blockchain, at all times, creating the backbone of the network. There is such a thing as a “light node” in that it does not store an entire copy of the blockchain, but for the sake and scope of this article, let's just assume a node is a full node.
Now, it is not technically necessary for all full nodes to be online 24/7, because (on a healthy network) there are usually enough nodes online at any given time for the blockchain to function properly. However, the more nodes that are online, the stronger the network is. Many wallets can act as full nodes while they are open and connected to the Internet.
This is where the fundamental function of a “masternode” comes in. A masternode must meet certain requirements, mainly they must be online at all times. Having masternodes in a blockchain network makes the system inherently more stable, fast, and secure. Typically, a very small amount of downtime is allowed, such as a brief loss of Internet connection every so often. If a masternode goes offline for an extended period of time however, it will stop receiving its rewards, be penalized, and/or be banned from the network.
To help mitigate such downtime from occurring, most projects require a masternode to be run on a Virtual Private Server, or VPS, which by nature provide more bandwidth, lower latency, better uptime, and are overall more reliable. Some projects even require their masternodes to have a valid SSL certificate attached to increase the security and integrity of the server. Although it is technically possible to run a masternode hosted from a local server at home, due to the stability, bandwidth, and up-time needed to successfully run a masternode — this is usually not feasible — and therefore a VPS solution is the most common method.
So by incentivizing people to run masternodes, a blockchain will benefit from their constant and consistent up-time, in turn creating a stronger network. In addition to this, masternodes can facilitate other special features for a blockchain ecosystem such as;
- Instant Transactions
- Private Transactions
- Enhanced/Additional security features
Some projects allow the operators of masternodes to use them to vote on changes in the project. This can be anything from changes to code, consensus protocols, allocation of project funding, or other proposed features. A great example of this is the Dash project. In fact, Dash was one of the first (if not the first) projects to implement masternode technology.
An example of an enhanced security feature facilitated by masternodes is “Thor’s Hammer” by the Snowgem project, a 51% attack mitigation solution implemented on the Snowgem blockchain. Without going into detail, Thor’s Hammer provides additional security by having all the masternodes on the network do some extra behind-the-scenes work to mitigate such attacks. You can read more about it here.
How Profitable is Operating a Masternode?
The answer to this will vary drastically from project to project. The major factors are:
- The current price of the cryptocurrency in question
- The amount of collateral needed
- The VPS specs needed and the cost to obtain/maintain
- How many total masternodes are currently on a given network
Masternode profitability is measured in whats called Return of Investment, or “ROI”. This is calculated by determining the upfront collateral costs, and how long it will take to receive enough rewards to make back this initial investment. ROI is usually calculated as an annual percentage. So for example, a project that claims a “50% Annual ROI” means that in one year you will have made half your investment back, and after two years you will have broken even.
After which time, all rewards are technically profit (minus the costs to continue to operate the VPS).
You may be asking yourself — “How do I calculate all of this!?”
Alas! There are great resources available to help automatically calculate these costs and show current profitability/ROI for numerous projects in real-time. Some popular ones include;
Here is a snip from Masternodes Online main page:
One important thing to note is that as more masternodes come online on a given network over time, the fewer rewards a masternode will receive — as the rewards are split evenly among all masternodes that are currently online.
So, keep this in mind when choosing a potential project to invest in, and when calculating ROI. Again, refer to the resources above for help!
How do I run a Masternode?
In summary, masternodes are special full nodes on a blockchain network, that reward the operator for running them. They also strengthen the network, and can potentially provide other special features or enhance security to a blockchain!
You may be thinking — this is all fine and well — but how do I actually run a masternode? As we discussed, the requirements vary slightly for different projects, however, the basic requirements for most are:
- Obtain the collateral — the amount of coins to “lock up”
- Obtain a Virtual Private Server with required specs
- Ability to follow a setup guide for the desired project
Though it does help to have some technical knowledge to set up a masternode, most projects provide fairly simple to follow guides that even the non-technically inclined can understand!
Now that you know more about what a masternode is if you are interested in what the process actually looks like — please go check out this article for a step-by-step guide on how to set up a Vidulum (VDL) masternode!