Last Update: 2019-04-08
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What are masternodes and what do they do?

“Masternodes are network validators in some cryptocurrencies. They act in a consensus mechanism relying on the principle of holding a stake in the network. For their work and the stake, the operator holds, he is then rewarded by the block reward.”

While the answer above maybe the quick and short answer to the question, it requires a lot of prior knowledge to be able to truly understand it. Depending on the amount knowledge you have about cryptocurrencies you may want to jump in to the marks that reflect your knowledge point.

I don’t know how cryptocurrencies work –

Cryptocurrencies are a concept developed by the anonymous person known as Satoshi Nakamoto as a Peer-to-peer Electronic Cash System. Most people refer to the actual underlying technology as blockchain or decentralized ledger system. While these terms are quite fancy and contain complex technical aspects the core concept is easily explained in contrast to a centralized architecture. The majority of the internet or modern IT systems are centralized systems, which in essence means that the system, this could be anything from a website, an information storage such as government database of property titles, or bank database. These systems are characterized by the fact that they are operated, managed and owned by one or few entities and hosted from a rather centralized location. If someone were to operate a digital currency on this this type of system, they would have full control over every transaction that the users perform, all users balance and they would have the ability to inject the personal incentives in the network. Additionally, aside being at risk of being tampered with by the operating entity it also means it is a central point that can be attacked, for malicious purposes. Thus, it would be highly unlikely that a digital currency could ever operate successfully in such a setup.

These distributed ledger systems take the ownership and operation away from a central entity and spread it over the entire network. Where the network refers to everyone accessing and using the system. This not only has its applicability in cryptocurrencies, but also in a large variety of other application fields. In simplest form, everyone on the network stores a copy of all previous transactions and a large number of people on the network need to approve of new transactions, before they are accepted as valid.

This not only removes the control and responsibility of the single operating entity and spreads it over everyone that is part of the network, but it also makes it far more secure. Because if someone would want to change a prior transaction in his favor, this would need to be approved and changed by a majority of the entities on the network. That alone can be millions in some cryptocurrencies, making it rather unlikely that it is possible.

I know the basics of cryptocurrencies –

Considering that cryptocurrencies are distributed across an entire network, it must be understood how such network operates. In essence it is a collection of nodes that are interconnected and store and work with parts or the entire blockchain. To clarify nodes are devices connected via (usually) the internet, which can come in form of a standard computer, a server or a dedicated mining device, owned or co-owned by an entity (person or company). Most cryptocurrencies operate with different types of nodes, where each type has a specific purpose to ensure the operation of the network. These can be full nodes that store a complete copy of the blockchain, nodes that only hold a user’s wallets and the networking capabilities, mining nodes (in PoW network), networking nodes, hybrids of these or other alterations.

Masternodes are a type of full node which store a complete copy of the blockchain (all prior blocks of transactions), as well as performing specialized tasks that are exclusively reserved for them. The first coin to integrate masternodes into its network was Dash as a pioneer in the field. In their network the masternodes take over the tasks of:

  • Facilitating nearly instantaneous transactions
  • Facilitating anonymous transactions of Dash
  • Participating in the blockchains governance, by judging and voting over technological and financial developments for the blockchain

Masternodes could come to use in most forms consensus mechanisms. Bitcoin being the largest cryptocurrency, it uses a Proof-of-Work (PoW) consensus method, the bitcoin network does not use masternodes and rather relies on mining to validate the network. Yet that does not mean that it is not possible to utilize the concept of masternodes in such a network. While masternodes conceptually rather align with a Proof-of Stake (PoS) concept, they are not elementary to all coins that use a PoS consensus method, rather it is up to the coins operator or initiator to incorporate them into the consensus algorithms. Thus you will find a variety of coins that use masternodes, with different consensus mechanisms, different configurations and purposes (Jump to list of coins that have masternodes).

I get the basics of masternodes, but why and how? –

Similar to how in a regular PoS consensus method staking nodes are selected to solve a block and others are used to validate it, masternodes perform relatively similar actions. Thus, they are also rewarded for their operation.

In order to hold a masternode there are a few requirements, aside from the ones that go along with all full nodes, these include enough storage space to sync the full blockchain, enough processing power to process the validation and verification and a reliable always-on internet connection. However, in order to operate a masternode it is required to hold defined amount of coins to prove a stake in the network. Each coin will have a predefined amount of coins required to operate a masternode. Just to provide a few examples for a Dash masternode it is required to hold 1,000 DASH or for PIVX the threshold is 10,000 PIVX. Depending on the coins value this can be quite a costly commitment to make. However along with the high barrier to entry comes the benefit and logic they are built on.

The purpose of the high threshold that is required to operate a masternodes is aimed at maintaining a more decentralized network, as it becomes extremely expensive to hold a large number of masternodes. Additionally, it incentivizes honesty, as an entity that has invested such a large sum loses the incentive to tamper with the network, because it risks their own substantial investment.

Similar to the traditional PoS where users are rewarded for staking in the network. The network also rewards the masternode owner with a part of the block rewards. In consideration of the high investment and responsibility of the masternode these rewards are relatively high. Such Rewards are payed out on a regular basis, depending on the networks configuration the payout interval may vary, however in most cases it is daily, weekly or monthly. In order to operate the Masternode the node must have the required amount of coins locked in the wallet, else it will be rejected by the network, further it is critical to be constantly available for the network, as a loss of connection would cause a distrust and a failure to be there for the network. This makes the environment that they are hosted in so crucial, as well as meaning that investments are locked in if self-hosted.

The use of Masternodes in a cryptocurrency has been coined Proof-of-Service, by some of the leading coins in the field. However, it does not need to be a stand-alone consensus method it can also be used in conjunction with PoW and PoS (stake). In fact, it is only seldomly used as the only consensus mechanism in a network and more commonly used as an additional or enhancing consensus mechanism, that takes over specialized tasks.

What cryptocurrencies have masternodes?

The two most famous cryptocurrencies Bitcoin and Ethereum rely on proof-of-work as a consensus mechanism and both don’t make use of proof-of-service (masternodes). Thus, it is not possible to operate masternodes on their networks. It is only possible to operate a masternode on networks that have this architecture and philosophy imbedded into their network.

As of now there are over 400 different cryptocurrencies that feature Masternodes as a consensus mechanism. Many of them are very small and have yet to prove themselves, by gaining volume and market capitalization. However, there are also quite a few large coins like DASH, the entrepreneurs of Masternodes, that have already established quite a substantial reputation and market position.

Coins featuring Masternodes, ranked by Market Capitalization:

  1. Dash ($ 1,172,371,799)
  2. PIVX ($ 62,396,557)
  3. Zcoin ($60,049,626)
  4. EtherZero ($ 52,855,165
  5. Horizen Securenode ($ 47,261,777)
  6. SysCoin ($ 37,109,309)
  7. Wagerr ($ 31, 331,659)
  8. Energi ($ 26,110,676)
  9. Blocknet ($ 15,891,464)

(Last Updated: 7. April 2019)

It is recommendable to perform research into the coin, before investing into it. This allows for a clearer perspective of the risks and opportunities. Hereby one should look at some of the metrics, from a reliable source as well as some research on the coin and its initiators. In Consideration of the metrics one should evaluate the traded volume, the market capitalization and the growth of the network. Also, how does this trade volume occur, is its actual transactions or just bot trading’s to artificially manipulate the metrics. Also, a helpful insight is any prior news on security flaws, to know how secure the used technology is.

Where to set a threshold in these metrics can’t be defined as it depends on many factors such as your own willingness to take risks, or support new upcoming networks, or actual insight into the coins network and how it operates. When investing into some of these smaller little-known coins, it may also be advisable to read their white-paper to get an initial idea of their operation, goals, methodologies and background. However, be aware that with those coins there are also few out there with the intent to scam investors. This risk is not neglectable with the more established coins, but generally the track record required to achieve their standing proves that they have more long-term ambitions.

Masternodes as an alternative to mining?

Over the last years one topic in specific has dominated the passive income topic in the cryptocurrency field, which was mining, which for a long time generated high returns of invests for affordable investments. However, that was also bound by the growing value of the cryptocurrencies, the expedited in 2017 and then dramatically declined in 2018. Adjacent to the fall the profitability of mining fell to points where ROI’s where eaten by costs of power consumption, which gave rise to new concepts that also allow passive earnings. With Masternodes becoming the new buzzword, a small community explored the new form of network validator, which additionally also creates very attractive ROI’s.

In most networks the block rewards are split between the miners (PoW) or stakers (PoS) and the masternode operators. However, considering that there are currently only a few thousand masternodes per cryptocurrencies (as of now), or less in some networks, the share that stakeholders of a masternode earn is very interesting in generating a strong ROI.

While in mining the equity of the investment is locked in in hardware purchasing costs, the ability of rehabilitating this investment is dependent on the market resale value of the hardware, which then again is also dependent on the ROI’s that can be achieved with the mining, or when working with graphic cards, the demand in the rest of the computer market. In cases of some mining pools investments could not be retrieved at all. Which means that the entire or parts of amount invested is automatically gone, so only the earnings generated are what can be retrieved.

On the contrary when operating a masternode, the amount spent as an investment remains locked in the wallet until one decides to deactivate the masternode. In the meantime, it similarly to the mining business generates substantial earnings, possibly more. At that point the invested sum is unlocked and can be used again or exchanged. Thus, the invested sum is not spent, rather just deposited, meaning that actual earnings can be generated from minute one, instead of having to refinance the invested sum. However, one must always consider that the investment is always held in a specific coin’s currency, therefore the value of the investment is bound to the coins exchange rate or coin value. This is of course a two-way street, meaning that it can dramatically rise or fall in value. The earnings however are freely accessible once they are paid out. The operator can choose to keep them in the coin, spend them, reinvest into another masternode (if enough earnings are collected) or he can trade them to other currencies for further use.

How much can I earn and what are the risks?

Cryptocurrencies that make use of masternodes as a consensus mechanism in the network, reward the masternode operators with coins. These block rewards may stem from transaction fees, newly generated coins or special processing fees. Dash pays 45% of block reward to masternodes in the network, which is equal to the 45% that the network pays to all miners collectively. However due to the high invest per masternodes it is more likely that there are less masternodes than miners that the reward needs to be distributed over. This is why many masternodes currently feature a such high returns of investment. These generally range between 20 to a few hundred percent annually.

Hence, as soon as one is able to afford the required amount of coins needed to hold a masternode, earnings are rewarded by the network and paid out on a regular basis defined by the network. The amount is determined by the network and can slightly fluctuate, but just to provide an example:

Earnings Daily Monthly Yearly
Energi Coin 25.7930 NRG 773.7900 NRG 9,414.4450 NRG
US Dollar $38.9801 $1,169.4017 $14,227.7212
Bitcoin 0.00951555 BTC 0.28546661 BTC 3.47317705 BTC
Data from 28.03.2019

While it of course takes a lot to afford the initial 10,000 NRG, the ROI that this investment type brings is phenomenal, in contrast to almost any other form of investment. In addition, it is worth noting that this is a continual flow of earning based on the systems operation and not dependent on luck to achieve these ROI’s. Furthermore, additional growth can result from an increase of the coins value. Meaning that the value of the coins that you need to hold in the wallet in order to operate the masternode, will be subject to its exchange rate. Due to the volatility of cryptocurrencies the value of the coins you hold may also increase exponentially. Not only having a positive income on the earnings generated, but also on the amount initially invested.

Potential Risks:

Below are some of the hypothetical risks that we could think of in regards to investing into masternodes.

  • The most obvious and substantial one is presumably that there could be a substantial dip in value of the cryptocurrency that you hold a masternode of. This would of course impact the value of the investment that you invested. This is something that cannot be neglected, but is unavoidable, as any currency can fluctuate. Also, without downplaying the risk, it should also be noted that if the value of the currency increases this also positively reflects on the investment. To partially minimize this risk, the earnings that are generated can be exchanged to another currency that may be known to be more stable, lowering the risk. This would at least secure the return on invest.
  • Security. While cryptocurrencies are known to have quite solid security, due to their decentralized and cryptographic infrastructure. But it cannot be guaranteed that there may be a security breach. However, the most common form of attack is not on the network or the wallets directly, rather it is a scamming attack on the users or the exchanges. Thus, it is essential to have enough knowledge regarding such attacks when operating a masternode.
  • There is a very unlikely chance that the governance of a cryptocurrency decides to change its Conesus mechanism, to not use Masternodes anymore. In that case however it would just stop supporting masternodes in the network, meaning that the investment is unlocked again and you can use the invested sum at your disposal. Thus, it would just mean the end of future passive income, no risk to the previously earned income or the invested sum.

What is NodePools and how does it work?

What are the benefits of using NodePools for Masternode investing? –

NodePools is a platform that enables you to simply invest a sum of your choice into a pool of Masternodes of a coin. It lets you choose a coin that meets your expectations and place an investment to quickly reap the earnings, while removing a lot of the issues of operating a Masternode yourself.

Conventionally investing into masternodes requires you to invest substantial amounts of coins that often translate into thousands of US$, an investment that not everyone can afford. With NodePools the minimum invest is as low as US$ 50, as you are investing into a stake of the pool of masternodes and aren’t required to hold 100% of it. This also allows you spread larger investments over a number of coins reducing the exposure of being affected by fluctuating coin values.

Also, manually setting up a Masternode can be complex if you are not an expert in the field and can perform some coding task. And it requires you to operate a private server on a stable network connection, to assure that the masternodes are constantly available via a static public IP-Address. With NodePools you get rid of all of this hassle and worries as we take care of all operational aspects. Further our security team is well trained and equipped to protect the masternodes form the majority of the hacking and scamming attacks that a normal operator needs to fight with.

With NodePools you have full control over your investment, as you can control where the money goes to, unlike other providers in the field and we provide prompt payouts of your earning on a regular basis to your personal wallet. Also, all earnings are paid out in Bitcoin (BTC) to simplify investments into multiple coins and to spare you the process of having to manually exchange them. Further we believe that it is beneficial for the risk aversion to exchange the earnings into BTC, to lower the risk of exposure to currency fluctuations of the smaller coins, thus we made it an essential component of the payout process.

While we suggest to make payments of investments in the coins that you are investing into, we also provide the additional service of exchanging Bitcoins (BTC) to the coin that you are wishing to invest into, as it spares you the hassle of manually trading them on the exchange places.

With this simplicity there is not much in the way of you earning these tremendous ROIs if you choose to invest with NodePools. You may however ask what the costs are and we want to be fully transparent about this. In order to become a member on our platform there is a yearly membership fee of just US$ 20 (paid in BTC), no up-front investment fee or additional transaction fees for direct investments. We simply calculate a small share of 20% of the final earnings for the operation of our service and to compensate for the server costs of hosting the masternodes.

Once you are an active member we also provide you with additional channel for income. If you help us grow by inviting your friends we will generously reward you with up to US$ 5 per invited member and we reward you with up to 2% of their earning (paid by us, not them). This also goes for the people they invite, but if you want to find out more on this, read our info on the referral program.

We are going to launch NodePools really soon and are just working on the final touches to make it work seamlessly. In the meantime, we encourage you to use the chance to pre-register. Then we will let you know once we launch and provide you with access to your account. Also, you can already start inviting your friends during the pre-registration phase, to start collecting leads for rewards.

Pre-Register Now