What is a Masternode?

You heard about masternodes but are not sure what they are. You have wondered why they are interesting and what they are used for. You would like to know more!

You are in the right place! On this page, you have all the info you need to understand what a master node is!

Before jumping into masternodes, I need to make sure you understand two concepts. Blockchain and Blockchain nodes. I promise to keep it brief 🙂

What is Blockchain?

Blockchains are all the rage. This is because they are the only ledger which is distributed, censor-proof and tamper proof. This means they are very resistant to attack. The internet was built so that it could withstand a nuclear war. The blockchain is a banking system that can withstand a nuclear attack. Before blockchains all ledgers where centralized. Those who control centralized ledgers have the power to hide, undo or execute any transactions they would like to.

Blockchains are different anyone can create an account, process transactions and operate a node. Each of these steps is not controlled by any central entity.

A Blockchain is an electronic chain of blocks. Each block is linked to the one behind it and in front of it through cryptographic hashes.

These hashes are mathematical algorithms that make sure that the connection between blocks cannot be compromised.

Blocks contain transactions; a transaction is the movement of coins between one address and another.

Blocks are created by miners, who compete with each other to process blocks. They are rewarded when they process a block successfully.

Miners pick transactions to process from the MemPool. See for example the Bitcoin MemPool and the Dash Mempool Transactions fees play an important role in how miners determine which transactions to include in the next block.

If no blocks are created there is no blockchain, because no transactions are processed. Miners are incentivised to process blocks because each block contains a block reward.  This block reward is denominated in cryptocurrency. For a Bitcoin Blockchain the block reward is in $BTC and for Dash it is in $Dash.

What is Masternode Project?

A masternode project is typically a blockchain project designed around creating a service which leverages blockchains. The first wave of masternode projects where pure cryptocurrencies such as Dash and Pivx. The second wave are offering more niche services such as blockchain developer platforms (Crown and Rebel),  Gaming platform (Ionomy) and shopping (MUE). Each of these projects use blockchains as their technical layer, their funding mechanism and their governance model.

What is a Blockchain node?

The explanation is based on Bitcoin, but each blockchain has its own node rulebook.

Miners send their processed blocks to the nodes. The nodes check the block and can either accept it or reject it. Nodes are connected to each other and synchronized to make sure every one of them has the right and the latest copy of the ledger. Just as each ATM knows your bank balance.

A miner used to need to run a node; however since all miners run through a pool, this is no longer the case.  This is important because there is no incentive to run a Bitcoin node. Volunteers keep a network of 10,000 nodes alive.  Anyone can run a node. In the banking system the central bank acts as a coordinator between the banks, but in a blockchain system, there isn’t a central bank.

Processing of transactions is happening 24/7; blockchain does not have banking holidays. Nodes need to be operational and connected to the internet to be able to participate in processing transactions.

Without nodes, a blockchain cannot function. If there are zero volunteers, for example, because Governments around the world made nodes illegal. A blockchain would not be able to process transactions.

What is the difference between a masternode and a blockchain node?

The only requirement to run a blockchain node are computing resources.

To run a masternode you need both computing resources and a specific amount of coins held in collateral. This collateral is frozen as long as the masternode is in operation. For example, for Dash this is 1,000 Dash coins.

Why does a masternode require collateral?

An evil masternode owner can attack the network, buy being a bad actor. In addition, masternodes share rewards between themselves. The fewer there are the higher their earnings. Masternode owners have a motive to bring other masternodes down.

This risk is minimized by the Dash bond frozen. If masternode owners start attacking each other then the market will treat this as a negative and demand for the Dash coins will drop. This will reduce the price of the underlying bond.

What is the difference between a masternode and a miner?

Miners create blocks but masternodes do not create blocks.

One can think of miners as being the first or base infrastructure layer. While masternodes are the second layer.

Miner provides the basic block creation services, and masternodes offer complementary services such as instant send, private send, treasuries and governance functionality.

How does a masternode generate income?

Each block unlocks a block reward, in masternode coins, this is split between

  • Miner
  • Masternodes
  • Treasury

Crypto mining generates an income as an incentive to create blocks.

Different masternode coins have different rewards split ratios between miners, masternode and the treasury system. Some even have founders rewarded embedded in the block reward.

All masternodes earn a block reward in a round robin fashion.

What is Masternode?

Not all cryptocurrency have masternodes. For example, Bitcoin Cash and Bitcoin do not have a masternode system. They only have unincentivized nodes.

A master node is a second layer processing system for blockchains. It offers the following additional services:

  • Instant transactions
  • Private transactions
  • Treasury management and Funding
  • Governance voting
  • User Friendliness

Instant Send. Mining takes time and this delays transactions from being final. Masternode can create a voting quorum, which allows them to block transactions to verify them before they are mined.  Instant send enables other opportunities where fast payments are important. Who wants to wait five minutes to pay for a coffee? Arbitrage traders need to move funds between exchange accounts fast; instant send transactions cater for this need.

Treasury and Governance

Blockchains projects need funds to develop further. This can be done in two ways, the first is via ICOs the second via an ongoing treasury funding systems. ICOs pay the inventors for an idea before their idea hits the market. We have seen time and time again that this does not work. A typical recent example is :

On the other hand, a masternode treasury system is continually funded through block rewards. The treasury can pay for projects which further the blockchain s technical and business development.

Project go through an approval process before the treasury funds them. Anyone can propose a project as long as they pay a fee. Once listed the MNs can vote for the project.

With such a system it is more difficult for any project to promise but not deliver more than once.

Private send provides fungibility. This means that no coin can be tainted just because it went through certain addresses. Cash is very fungible because no ones know what is the transaction history of a fiver.

If this were not the case, people would start shying away from using cash which was used in transactions they do not approve of.

The above functionality is implemented in most masternode coins. Dash is building more functionality. For example:

  • Evolution (User Friendlies)  (3 years in the making)
  • Chain Locks (51% attack protection)
  • Dash Ventures

User friendliness. Dash is in the process of creating a user-friendly system for payments that will match PayPal. Evolution will turn dash into a dApp platform, which even a grandma can use.

Anyone will be able to build a dApp on the Dash network. The first such dApp will be the Dash wallet. Users will be able to create accounts and have user-friendly addresses.

Evan Duffield of Dash Labs has talked about creating a scholarly article peer review system using Evolution. Ultimately user friendliness should increase adoption

Dash Ventures is an entity which is owned by the Dash masternodes. It’s objective is to invest in projects and then use the proceeds to burn dash. This will reduce the supply of Dash coins making the other coins in circulation more valuable.

Chain locks is a system to thwart any 51% attacks. A 51% attack is when slightly more than half the miners collude to double spend a coin.

What is a masternode owner and masternode operator?

A masternode owner is a person or entity who owns the mastenrode. Dash has recently introduced changes that allow the masternode owner to delegate masternode responsibilities such as voting to a third party. This third party can be referred to as the masternode operator.

What is a masternodes hosting?

There are two ways to host masternodes. Either through a self-managed VPN or through Masternode hosting service.

Learn more:

How to install a Masternode?

Buy the required number of coins and then a few more to pay for the transfer fees.

Transfer the required amount in hardware of software wallet.

Create the node, either on your own VPS or through a node hosting service.

Setup your wallet with the details of your node and collateral address

Once the node has been loaded you can launch it from your wallet

Problems with masternodes

Any system has pros and cons. There are issues with Masternodes. Masternodes need to engage with project proposers both to define their needs and to negotiate better terms for the proposals. This is not always the case, because there are many projects being proposed. It takes time to analyze them all.

Projects which are funded by the treasury and are fully transparent are rare. it is hard to see how the funds are being spent. How much are the marketing and the salary costs?

Some projects become “mainstays” in the treasury system. They become so entrenched in the ecosystem befriending masternode owners that they get approved on each funding cycle.  This is a problem. Any sort of monopoly, even the milder sort, tend to deliver less value with time and increase in cost. When voting for projects, MNs need to challenge the project proposals to deliver more value in each round of funding. There are no projects which measure themselves through a set of measurable KPIs.

Maternodes are an alternative passive income asset. The returns are highly variable in purchasing power terms. The returns earned are in cryptocurrency which fluctuates wildly. This makes such assets hard to depend on for life’s expenses.

Conclusion

Masternodes are a stroke of genius. They solve some core problem of cash flow for blockchain. Owning a masternode comes with both rights and responsibilities. The long term success of a project depends on Masternode operators being active and engaged. MNs are here to stay; they will most likely exist in some form or another for the foreseeable future.

Not investment advice. Not financial advice. Consult your financial advisor. Not a recommendation to buy, sell or hold. The staff of this site may own these digital asset/s mentioned on this page. Investing is risky and you may lose all your capital. See full disclaimer.

Keep in mind that we may receive commissions when you click our links and make purchases. However, this does not impact our reviews and comparisons. We try our best to keep things fair and balanced, in order to help you make the best choice for you.

Author: Jim Reynolds
Jim Reynolds. Is passionate about finance, passive income and cryptocurrencies. He writes about his passions on NodesOfValue.com. He has worked in the tech and financial industry for a few decades. He holds a masters in business admin and a bachelors in IT. All his writings are not investment advice.

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