What are Masternodes; A Brief Introduction to Running Validator Nodes

Mining cryptocurrency is one way to obtain it, but mining differs for proof of work and proof of stake coins. Running masternodes can be a profitable endeavor, and this article explains what they are and how they work.

Bonded validator systems, aka masternodes, are becoming an increasingly popular mechanism in blockchain networks and proof of stake protocols. Masternodes are considered a critical backbone and are comprised of servers that uphold a blockchain’s network. These nodes are responsible for enabling specific services that cannot be accomplished by miners using a proof of work consensus mechanism. The first cryptocurrency that utilized the masternode model as part of its blockchain consensus mechanism was Darkcoin. Darkcoin was later rebranded by the community and renamed as DASH.

Masternodes are similar to proof of stake protocols in that they rely on ‘staking’ or locking away a certain amount of a specific cryptocurrency within its network. To first establish a masternode, you need to own a substantial amount of the specific cryptocurrency. For example, A DASH masternode requires 1,000 DASH, and a PIVX masternode requires 10,000 PIVX to be deposited into a proprietary wallet. Once you stake your cryptocurrency, you can earn rewards or a yield in the form of additional cryptocurrencies. 

The process is sometimes difficult but there are usually specific guides by the project team that can help you with the masternode setup . Initially, this involves downloading the core wallet associated with the cryptocurrency and using it to create a masternode. This basically turns your computer into a server that is utilized by the core wallet software to run as a node that supports the blockchain network.

Masternodes have the following characteristics:

  • Instant and/or anonymous payments
  • Decentralized governance system by enabling node operators to vote on important developments within the blockchain
  • Incentive or reward system that compensates node operators for assisting and supporting the blockchain network (similar to a mining reward in a proof of work system)
  • Protect blockchain from certain network attacks like 51% attack, similar to traditional proof of stake algorithms in this regard

Each specific cryptocurrency has its own set of rules and conditions for successfully maintaining a masternode. If the conditions are not met or the cryptocurrency is moved from its ‘staking’ position, the masternode will no longer operate as part of the blockchain network. Unfortunately, running a masternode is not as simple as just holding a large amount of cryptocurrencies in a wallet, but there are definitely benefits to going through the process.

One of the main benefits is that running a masternode gets very expensive unless you have lots of money or you get into a specific cryptocurrency during a public presale or ICO. The requirement to own a large position in a cryptocurrency works as a barrier to entry for masternodes, which helps diversify node holders and prevents a monopoly. It fundamentally helps keep the system decentralized. Also, the cost of operation keeps the node operators honest and ensures that they adhere to the blockchain rules in order to receive the reward, or else their node is not included in the network. This helps maintain a framework to ensure everyone plays by the same rules.

The rewards for staking and maintaining the network are typically worthwhile and can generate significant returns over time.However, this will decrease over time as the number of nodes increases.

For example, DASH network node operators earned roughly 47% ROI in 2016, which was a great return and essentially passive income.

Another thing to note about masternodes is that it is highly encouraged by the cryptocurrency community. Locking away coins as part of masternodes decreases the overall circulating supply. So anytime there is an increase in demand, the coin price spikes upward as there is less in circulation.

To sum up, masternodes are great for those that want passive income streams and have enough money to meet the initial coin requirement. Staking coins for rewards and operating a node that confirms transactions, facilitates, and support the blockchain network is one of the best systems to maintain decentralization.

Below is a list of some of the top cryptocurrencies that utilize the masternode system

Vechain Thor (New)

Waltonchain (New)

NEM

NULS

PIVX

DASH