Cryptocurrencies work on the blockchain technology. This underlying technology helps to settle transactions in real time and also guarantee security. The public ledger maintains a record of all transactions that have occurred between the members in the network. Members of the network who keep a local copy of the ledger are called as nodes. These nodes could be either full nodes or light nodes. A few cryptocurrencies use a second tier to increase security and also provide additional functionality. These are called masternodes. Nodes are responsible for mining which creates new currency on that network whereas masternodes perform specialized transactions that miners cannot accomplish. A masternode is a complete node which hosts the entire copy of a blockchain in real time. Hosting a masternode can be considered to be a good option of passive income. However it is required that masternodes stake a fixed amount of digital currencies before they can be accepted as masternodes.

A detailed understanding of a Masternode

A blockchain works on a set of defined rules which have been mutually agreed. These mutually agreed set of terms are called as consensus mechanism. Proof of Work and Proof of Stake are some examples of types of consensus mechanisms. The oldest digital currency Bitcoin works on the Proof of Work consensus mechanism where miners verify and add newer transactions the mainchain. Mining is a computation intensive process and the miner is rewarded in digital currencies for his work. Proof of Work systems are energy intensive and hence being replaced by a more efficient mechanism called Proof of Stake. Proof of Stake attributes mining power to the proportion of coins held by the miner. Masternodes are partly based on the Proof of Stake consensus mechanism.

The first cryptocurrency to implement masternodes was Dash. Dash uses a Proof of Service mechanism which contains two tiers of networks. The first one consists of the network of miners to achieve distributed consensus on the blockchain. The second tier is made up of masternodes which provide special functionality such as InstaSend or voting on budget funding. Masternodes operate under a collateral based system to ensure their integrity. Masternodes are rewarded for processing transactions on the network in real time.

Working of a masternode

Establishing a masternode requires holding a substantial amount of that particular cryptocurrency. 1000 Dash are required for running a Dash masternode. This amount is then staked to create a masternode. The core wallet of the native cryptocurrency is required to create the masternode. The wallet integrates your computer as one of the nodes that support the blockchain. Masternodes enable a variety of features such as instant or anonymous payments. It also allows masternode operators to vote on important developments occurring on the blockchain. Masternode operators usually earn an equal 45 percent of a block reward along with miners. The remaining 10 percent goes to a blockchain fund and operators are required to vote on how these funds should be used to improve the network. Each cryptocurrency has its own set of rules or conditions on establishing and maintaining a masternode. If these conditions are violated the masternode will cease to be operational.

Benefits of Masternode

Establishing a masternode could be a capital intensive procedure depending on the cryptocurrency. Majority of the costs include the upfront payment required to buy the digital currency which needs to be staked and for setting up the infrastructure to operate a masternode. This cost of operation also helps in keeping the network decentralized as no one person or entity can acquire a monopoly on the network. The rewards offered also help in motivating masternode operators to properly maintain their nodes without any malicious intent.

Dash originally established the masternode system to provide support for additional features. One of these is InstaSend, a way to implement instantaneous transactions. PrivateSend is another feature which allows users to send and receive instantaneous transactions. Dash masternodes also allow operators to vote on financial and technological developments for the blockchain.

Running a Masternode

Most cryptocurrencies that support masternodes require a node owner to hold a certain amount of coins. This is to ensure that they have a vested interest in the network. It also safeguards against node owners trying to sabotage the network for their personal gain. Each currency has its own set of guidelines to set up a masternode which can be found on their official website.

The basic procedure to set up a masternode remains common to all currencies. The first step is to purchase the required amount of coins on an exchange and transfer them to your desktop wallet on your computer. The next step is to synchronize the blockchain with your computer. A node address needs to be created to set up a masternode. The coins are then transferred to that address. This allows you to obtain the private key and transaction data required to set up the node. The final step involves setting up a server. This can be your own personal server or a private virtual server. A private server is more preferable since most cryptocurrencies require the node to be online 24 hours a day. Once the server has been built and configured, it can be started using the desktop wallet.

At this point the masternode is fully operational and will now synchronize with the blockchain. The rewards you obtain will be based on the regulations of the selected cryptocurrency. Some digital currencies also require masternodes to have a separate VPN network as well as an IP address.

Most masternodes require a high initial investment which might not be feasible for everybody. Another way to invest in a masternode is to purchase a masternode share instead of a complete masternode from a masternode holder. The reward earned will be based on the percentage of the masternode share purchased.

Crypto Assets that support Masternodes

Following the example of Dash various cryptocurrencies like Block, Crown, PIVX and many others implement masternodes on their blockchain. Block Net will use masternodes to support its decentralized exchange. Syscoin uses masternodes for its decentralized marketplace. BOScoin has integrated masternodes for its smart contracts and its Congress Network. This gives masternode operators voting privileges on code and policy modifications and also on revenue allocation.

Earning from Masternodes

Earning money from masternodes depends on various different factors. Selecting the appropriate cryptocurrency is the most important factor. If the selected currency does not have a use case it should be avoided. The masternode space has also been affected by scammers similar to the rest of the crypto market. Cryptocurrencies that offer very high interest rates should be scrutinized. The guidelines regarding the establishment of the masternode of that currency are the next factor to be considered. The returns from the selected coin should be good enough to cover the operation costs and also provide good profits. The value of the selected coin should ideally be worth significantly more in the future to be able to cover the initial investment.

Conclusion

Applications involving masternodes are quite flexible. It provides a balance between Proof of Work and Proof of Stake. Masternodes compensate for the limitations of Proof of Work and offers the best of Proof of Stake. This helps to avoid the centralized mining pools and consumes less energy than Proof of Work consensus mechanism. Masternodes offer increased stability and network loyalty as high initial investments and large dividends make it less probable that operators will leave their position on the network. It can also be used to keep miners in check. The Dash model gives complete authority to masternodes to reject or orphan a block if a miner or pool tries to manipulate the network. Masternodes have immense potential to further democratize decisions within a blockchain network.

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