Masternodes: The Ultimate Guide on All You Need to Know

For most cryptocurrency enthusiasts and newbies, making profits from cryptos stop at trading or buying to hodl. Interestingly, hosting a masternode is one of the best ways to passively earn money from cryptocurrencies. Sadly, masternodes are not talked about very often because most people are out looking for the next big ICO or coin that is set to “moon”, to invest in. This guide is going to walk you through what masternodes are, how they work, how to set up one, and what to look out for when selecting a masternode to invest in, amongst others.

Without further ado, let’s delve straight in.

What is a Masternode?

In order to understand what a masternode is, let’s start with the very basics and look at some history – how consensus is reached in blockchain networks.

Bitcoin and its underlying technology, blockchain, has been touted for being a decentralized network void of human manipulation. Blockchain transactions are typically cheaper, transparent, irreversible, and immutable. Its immutability and transparency come from the fact that it exists on a public ledger that is accessible to every node on the network.

In other to ensure that the network is stable and a transaction is valid, a consensus has to be reached that a particular transaction is real or rather valid. There are two common ways blockchain reach consensus – proof of work (PoW) and proof of stake (PoS).

Bonus Tip: Although PoW and PoS are arguably the most popular blockchain consensus mechanisms, there are other top algorithms like Delegated Proof of Stake (DPOS), Proof of Burn, Practical Byzantine fault-tolerant (PBFT), Proof of Identity (PoI), Proof of Elapsed Time (PoET), and Proof of Importance (PoI).

If you have ever tried to mine Bitcoin, then you should have an idea of what proof of work (PoW) means. PoW blockchain reaches consensus through a process called mining. Transactions are validated through solving complex mathematical problems before they are added to the blockchain. Once a transaction is added to the blockchain, it cannot be altered or manipulated.

PoW typically requires mining rigs, either application specific integrated circuits (ASICs) or graphics processing units (GPUs) mining rigs. Because they have to process a lot of data, PoW blockchains consume a lot of electricity. Also, only the first miner to solve the block gets rewarded, and this has made it a race of who solves a problem first. Mining has evolved from CPU mining to GPU, and now ASICs.

This limitation of PoW mechanisms triggered a shift to PoS algorithms. Instead of using miners to validate transactions, “validators” are saddled with the responsibility of confirming transactions. As the name implies, validators have to stake a certain amount of cryptocurrency and this grants them the right to make some decisions on the network. Masternodes take staking a step further because, in addition to operating a collateral-based system, they store the entire blockchain network.

A masternode is a computer server on a decentralized network that performs specialized functions on a blockchain network, essentially storing the full copy of a blockchain in real time. Since it stores the entire blockchain, it is sometimes referred to as a full node.

The functions of a masternode can vary from cryptocurrency to cryptocurrency. There’s no laid down rule that a masternode must perform a certain function. However, these nodes may perform functions ranging from performing instant transactions to managing the budgeting and treasury system of a crypto, participating in governance, and strengthening the privacy of transactions. Masternodes are rewarded with coins for performing these tasks.

Dash was the pioneer of the concept of masternodes in the cryptocurrency space in early 2017. Masternode holder were required to stake 1000 Dash coins as a collateral in other to host a masternode (as at the time of writing this guide, this is equivalent to $197,660). The reward of hosting a masternode on Dash was 47.5% of the block rewards. Without a doubt, the amount required to host a Dash masternode is significant and small-time investors may not be able to afford it. Nonetheless, there is a whole lot of other cryptocurrencies (some with lesser collateral, and other higher). Some examples of other cryptos that enable masternodes are:

  • Bata (BTA)
  • ION (ION)
  • Crown (CRW)
  • Neutron (NTRN)
  • ChainCoin (CHC)
  • ZCoin (XZC)
  • Vcash (XVC)
  • Bitsend (BSD)
  • PIVX (PIVX)
  • Bulwark (BWK)
  • Monetary Unit (MUE)
  • Amsterdam coin (AMS)
  • XtraBytes (XBY)
  • ColossusCoinXT (COLX)
  • Diamond (DMD)

In summary, it should be obvious that because of the specialized functions masternodes perform, it requires some big-time investments. Considering the fact that loyalty is scarce in the cryptocurrency space, investors are not expected to breeze in an out of a network (as with day trading). This means that a lot of money is required in order to buy a sizeable amount of the particular masternode. Once an investor is able to meet this and other requirements, he is granted access to a masternode, and can start getting profits.

Why Should I Run a Masternode?

If we are to be totally honest as investors, beyond the potential of blockchain tech to revolutionize the world, we are mostly in it for the money, or more appropriately the profits. If blockchain and cryptocurrencies aren’t rising or giving any return on investment, chances are that a lot of us would have dumped it and focused on more profitable investments. So why should you consider running a masternode as a crypto investor when there are other options like mining, trading, margin trading, or profiting from arbitrage?

The primary answer still remains the same – to passively earn some money. If you believe in a project and would like to see it grow, then running a masternode should be an option you should consider. This is because running a masternode increases the stability and authenticity of a transaction. As a user, you will also be involved in the governance of the cryptocurrency; meaning you have the right to vote for or against a particular line of action.

Finally, in this section, let’s put to rest one of the questions I get asked a lot as a crypto investor – “how much can I make from running a masternode?” Really, there’s no one-answer-fits-all to this question. Some cryptos offer higher incentives for running a masternode than others. How much you end up making will depend on the coin you decide to invest in, the protocol the masternode crypto is using, as well as how much the crypto eventually rises in the future.

For example, I joined invested some tens of dollars into a couple of cloud mining programs in 2017. Sadly, only one has been able to give me back a return on investment. The rests are still hanging and I am certain I won’t be getting back my capital. So, if a cryptocurrency hits rock bottom for any reason, there is every chance that your investment would have become worthless. This is why it is expedient to do a thorough research before investing in any masternode program.

Setting up a Masternode

This guide will not be complete if we don’t talk about how to set up masternode. After selecting the masternode you will like to run (we will talk more on this in the next section), the next important step is to set up your devices. If you opt for setting up your masternode by yourself, it is safe to say that you should have acquired some prerequisite knowledge on how the blockchain works, and you will be responsible to hosting, securing, and maintaining your masternode server. In general, you will be needing a server for hosting your wallet or a VPS, adequate storage space (since the blockchain is constantly growing in size), as well as a dedicated IP address.

Alternatively, you may decide to skip the hassles of setting up and maintaining a masternode from your computer by employing the services of a third-party host provider. Think of it like cloud mining (they handle all the technical aspects for you), all you need to do is pay for a service package or join a masternode pool. As with cloud mining, which I was actively involved in, I don’t recommend this option, unless you fully trust the company and have done some background checks.

Since Dash is more or less the pioneer of masternodes in the crypto space, let’s have a walkthrough on how to set up a Dash masternode. The collateral for hosting a Dash masternode is 1,000 DASH. Although other masternodes may vary slightly from these steps, it shouldn’t be hard setting up other masternodes once you are able to do it once.

  1. For a start, you need to purchase 1,001 DASH coins from any of the exchanges. The basic assumption is that you already have BTC or ETH (if you are in the US, you can buy Bitcoin from Coinbase). The extra 1 DASH coin is to cover transaction fees from your exchange to your wallet.
  2. Proceed to install your preferred desktop wallet on your PC and harmonize it with the Dash blockchain.
  3. Transfer your coins from the exchange to your wallet
  4. Create an address in your node wallet and send your coins to this node address. In the course of doing this, you will be given private keys and other details needed for further setup.
  5. Proceed to setup your node – this could be either on a personal home or office server or from a virtual private server (VPS).
  6. Once you have installed and configured your nodes to your wallets, start your server and wait for your nodes to sync with the blockchain.
  7. The last step is to set up and start your masternode on your desktop wallet and begin to earn.

What to Lookout for When Choosing a Masternode to Invest In?

Similar to the cryptocurrency and ICO boom in late 2017, more and more masternode coins are hitting the market every day. While some of these projects are truly genuine, it is safe to say there are also some fakes in the marketplace. So, here are 2 top markers I look out for when investing in a masternode.

High ROI

Just like high yield investment schemes (HYIP), any masternode that promises extraordinary returns is most likely a scam. It is simply illogical for any project team that truly understands the value of what they are bringing to the market to offer investors return on investments that are off the charts. From experience, if a project has value and a good team behind it, it will naturally sell itself.

Do not take my word for it though, if you see a high-paying masternode that tickles your fancy, take the extra step of researching the team behind the project, as well as the problem they are trying to solve.

Volume

It may shock you to know that volume also matters when investing in masternodes. Volume is an indication of how liquid a masternode coin is; the amount of the specific crypto that has been bought or traded in the last 24 hours, or in the last 7 days. If the volume is low, then that is an indication that the masternode coin is not highly sought after, and it may become difficult for you to cash out on your profits.

Alternatively, a high-volume coin may mean one of two things. It’s either that the project is truly doing well and has a positive outlook, or it’s just starting out and has a very high ROI quoted. For projects that are just starting out and have high ROI, they will naturally attract a lot of investors who would want rapid investment on their cash. In such a case, you have to be wary. Such coins will rapidly drop in value once people start cashing out.

To be on the safe side, look out for projects with volume in their tens of thousands of dollars.

Conclusion

If you have read up till this point, then you must be familiar with what a masternode is, and how to set up one. To wrap up this article on masternodes, here’s a final advice for you. “Avoid putting all your investments in one basket.” If and when you can, spread your masternode investments across multiple projects. This will protect you against losing all you have if one project decides to go south.