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You have heard about masternodes and their passive income potential, however, you are not sure how to start evaluating a masternode project for its ROI potential. In this article, you will learn how to understand masternodes, how to look into their potential for ROI.
All MN project have different rules in this article, the information in this article is generalized so you can understand any type of MN project.
What is a masternode (MN)?
A masternode is part of the infrastructure of a cryptocurrency blockchain. The MN owner needs to hold collateral to operate an MN. The MN owner needs to set up a VPS that is online 24/7; this will process blockchain transactions. The MN will get a share of the block reward, transaction fees. The rewards are denominated in the cryptocurrency of the project.
For a more detailed answer check: What is a masternode?
How do you measure return on investment?
Money is the It is not only about money.
Any investment can take away or give you these four elements:
- Energy (Opportunity cost of prime mental time)
Each person has four limited resources. Time because we will take all day one day. Prime Mental energy, this is the few hours a day where you are functioning at your peak. Money, which can be measured in a base currency or in purchasing power terms. Morale is a combination of self-worth, success, emotional turmoil and guilt.
Keep these in mind we will come to them later on.
What is the primary indicator of the potential for the ROI of a masternode?
Alignment of incentives.
When the founder’s incentives and those of the token holders need to be aligned, you have a higher chance of long term ROI. The founders need to have a very strong incentive to see the price of the coins go up. Finding out if the incentives of the founders are aligned is not an easy task. Many projects are not transparent enough to allow you to know the exact number of coins the founders own, when they intend to sell and how much they are selling.
Unregulated markets are a nice idea, but they come with several disadvantages. Those who have power have no reason to let go of it. Regulators are a middle man to protect all parties. IMHO they get too much negative marketing in this space! When they have a very valuable service to offer in protecting investors ROI.
How does a masternode generate a return?
There are three parties involved in a masternode project. MNs generate a different kind of reward for each of them
- The founders of the MN project
- The masternode hosts
- The users of the masternode project.
- The masternode owners
The return for the founders is funding for their dream project (or scam). Founders launch an MN project through an ICO, PoW mining or selling masternode packages. All of these methods are used to inject capital in the startup. This capital is used to set up the company, hire staff, developers and setting up the legal entities.
Masternode hosts, can be VPS providers or dedicated masternode hosting companies, they sell masternode hosting as a service.
Masternode project users
The end users are the most important of a masternode project. Users are end users who will use the services of the project. Few MN projects really focus on the end users.
The user of the masternode project is the most important element.
Without users generating real economic activity on the project, there is no long term ROI potential. For users to adopt the use of the facilities of a project, the project needs to provide something of value. As a rule of thumb to dislodge any established services, the alternative service needs to be ten times better.
How do masternode owners make a passive income from MNs?
- Block Rewards
- Transaction fees on the network
- Special project funds (example: Dash Ventures) (LINK)
The founders of a crypto project determine the direction and growth of a crypto project at least initially. This is because they create the parameters such as the block reward and transaction fees.
When the project becomes more established, MN owners can submit proposals for these parameters to be changed. However, the founders have a very strong influence on such changes.
All rewards are shared among all the masternodes. The more masternodes there are the less each masternode will receive.
Some masternodes projects share the transaction fees with the MNs. The more active the network is, the more transaction fees there are and the more revenue. However., the higher the transaction costs the less attractive it will be to use the network.
Special project funds
This is currently (March 2019) being implemented by Dash, and to my knowledge, no other project in the crypto space has implemented something of the sort. Dash has created the first of its kind decentralised MN fund.
The Special project fund is called Dash Ventures, it will be funded but the treasury. This fund will invest in projects within the Dash ecosystem and in other projects.
There is still ongoing discussion on how the MNs might benefit directly from Dash Ventures. At this stage, it seems that the fund will buy back Dash and burn benefiting the whole network.
Changes in the market and rules of the MN operations.
MN owners can be the victims of sudden changes in the rules to operate an MN, this could come from changing the collateral requirements. Which happened for Smart Cash, without any warning.
Delisting a coin from an exchange makes the coin less liquid. The lack of market liquidity makes it harder to liquidate the collateral or the returns from the MN if needed.
How can the MN ROI be managed?
MN owners have two ways to manage their income from their MN. They can exchange the coins for another crypto or stable coin or they can use the earned coins to generate more ROI.
- Hodled (kept)
Investing in MNs means a large commitment to a project due to the collateral requirements of an MN. For this reason, some MN owners prefer to exchange their income periodically in order to diversify their risk.
Another way to deal with the earned coins is to deploy them to earn more passive income. There are 2 ways to do this.
In case there is no staking the coins can be mobilized on an MN pooling service.
Another strategy would be to use any of the above 2 methods until enough coins have been accumulated to spin off another MN
Finding a masternode with good ROI.
Masternode financial ROIs varies from 1% to 10,000% APR. This makes the wild west look like a walk in the park.
There are 1000s of masternode projects and each project have their own masternode specifications. The devil is in the detail.
One important thing to understand is that masternode returns are in the cryptocurrency of a project. This means that the purchasing power (or USD equivalent) is fluctuating like a yoyo in a hurricane. The more volatile the project the more volatile the price and the more volatile the ROI.
The price of MN volatility depends on the phase or maturity of a masternode project. The more the market can see the long term viability of the project the more likely that there will be a bottom price for the coins and there will be more demand than supply.
To start your exploration in the potential masternodes you can look at:
Masternode projects categories
Your potential masternode ROI in the present and future will depend on how a masternode project evolves. Some evolve into a thing of beauty other not. Here is a simple classification for MNs
- Established projects
- Promising projects
- Undiscovered projects
- Projects that are doomed to fail
- Scam projects Learn More: Masternode Scams
Categorizing a masternode project is hard because you will never know what’s under the hood the Devs, founders and DAO management might have 95% of the picture, but the investor never will.
Some projects are very good at communication, with monthly project updates and quarterly calls. However, they have no legal obligation to disclose the dirty laundry. They are 100% unregulated.
Do your own research. Read as much as you can. Listen to any expert masternode analysts with caution. Learn more about Masternode Business Risks
Short term MN ROI or MN Russian roulette
Masternode projects sprout like weeds. They bloom and then quickly die off. The purpose they serve in their brief spring is to make the founders richer. money for the founders. Some investors are able to join the bandwagon and time their entries and exits perfectly.
This is a dangerous game and eventually, the players will get rekt (aka losing your money). There is always someone coming into the game which is faster, wiser and with some edge, you do not have.
Hyperinflation the MN ROI starter and killer
High ROI is what attracts the first wave of yield-hungry MN owners. This wave helps kick off the project. However high ROI means hyperinflation, that is there is a tsunami of coins coming into circulation. These coins are being unloaded on others that believe they will be able to sell them to someone else at an even higher price.
The market demand can only absorb a certain supply and eventually the price will start dropping. Everybody runs for the exits. At this stage, the devs or community tighten supply. As soon as the high ROI drop, demand dries up.
In some genuine MN projects, at this stage, the treasury should be big enough to bridge the project through the first signs of success. The community, or the bag holders, without any real sign of progress, will eventually admit defeat sell and move their attention to the next project
In order to deal with hyperinflation, some MN projects are increasing the collateral by steps. This makes current MN holders need to buy more coins or at least not sell all their earnings to keep their MN active.
Long term masternode ROI
Long term masternode ROI is about cash flow and ultimately profit for the project and the token holders.
A project needs at the very least cash flow to drive its operations forward. It can do this for a few months or years through the hype, community, announcements of partnerships, MVPs etc. Eventually, the community will bridge the gap between the narrative the project is putting out there and reality.
Perpetual cash flow can only be generated through the creation of the so-called moat. An advantage that is very difficult to copy.
Projects make mistakes. Dash has had an instamine and they have missed a lot of checkpoints on the road map. In 2017 and the first half of 2018 the steps toward evolution where not pronounced enough. It seems the tide is turning, especially after they fired the previous tech lead Chuck Williams and hired a new CTO, Bob Carroll. The speed along the road to evolution seems to be gaining momentum.
While Dash is open source, they have the first mover advantage of this tech. Evolution will turn Dash into a PayPal like system. This is the closest thing to a moat that I have seen in the MN space.
|The road to Masternode project growth||The road to Masternode project Oblivion|
Roadmap follow up
Good project proposals
MN owner participation
Established Market share
Creation of a moat
Decrease in communication
Promises and Promises
Community take over
(Wanna be developers take over the project)
Nothing of substance is ever delivered
Hardcore project believers (those who end up with large bags) keep pumping the project.
It is easier to lose money in MN investments than to make it. Scammers are getting sophisticated enough to trick even the seasoned MN investor. Keep your guards up! In addition to losing your money on an MN project, it is easy to lose a lot of time and energy through frustration on the failed projects.
Losing your funds in an MN project costs you more than your money. It costs you time energy and morale. Ultimately you risk getting into a cycle of investing in another high ROI MN project to make up for the losses, then you will most likely lose all your capital again. Sabotaging your morale leads to more mistakes.
Now, finding an MN gem is like finding the golden goose, this will keep laying golden eggs for a long while. Good luck in your quest!
If you are interested in more crypto passive income opportunities have a look at this: 22 Cryptos that generate crypto passive income