What are Masternodes?

Masternodes defined, investment facts, & key setup advice

Cryptocurrencies and the blockchain have taken the world by storm (the cyber part, at least). Yet the volatile nature of Bitcoin and other major cryptocurrencies has made it challenging to speculate and profit in a consistent and reliable manner. For those keen to explore more regular income through their existing investments, there is a newer option: masternode hosting. Masternodes - to an extent - are less affected by cryptocurrency price volatility, especially where Bitcoin is concerned. You can find more about specific availability with our Masternode list.

So how do masternodes work? And how are they different from “traditional” mining? Can I run a masternode set up? Read on.

Masternodes and Bitcoin, POS, and POW

To better understand masternodes, we need help from our old friend: Bitcoin. Bitcoin is a Proof-of-Work (POW) blockchain system i.e. miners compete for rewards to verify transactions on the network and create new blocks. By contrast, masternodes deal in cryptocurrencies backed by the Proof-of-Stake (POS) approach. Put simply, POS is the more recently developed system of verifying transactions on a blockchain through consensus rather than competition. This basic operational difference creates two sub-streams in the blockchain back office dealings. If you own POS coins, ensure you get a POS Wallet too.

When compared to crypto day trading, the price and market volatility of major cryptocurrencies does not directly affect masternodes used in the POS system to such a comparable extent. This makes it a potentially safer avenue of investment with a higher guarantee of return and regular income.

So how is hosting a masternode different from mining on the blockchain?

If you are into making money through cryptocurrency, you can head out to any good exchange like Coinbase and start speculating (or hoover up rewards from ICO bounty campaigns and through airdrops). But if you are looking to get a little deeper behind the scenes and actually become a part of the system, then you have two options: mining (as in POW) or forging (as used in POS and masternodes). NB: “forging” is the preferred term for creating new blocks among masternode users.

A mining node earns rewards by successfully mining a block. At present, this is not the most economical or ecological method and speculation has been made that Bitcoin mining will require the equivalent energy of a small country in the coming years. Not to mention the fact that it is a long and laborious process as well.

By contrast, masternodes, which host their chosen blockchain ledger, are compensated through the transaction cost of the blocks assigned to them for processing.

Note: nodes cannot be integrated with masternodes due to the different nature of the POW and POS systems.

Masternode set up

It’s called proof of stake for a reason: the greater your stake, or investment, the more clout you will have on your chosen blockchain network. Take DASH for instance, which is well known for being a good network to begin on. A 1000 dash credit is required before you can begin hosting a masternode. That kind of credit can cost up to $200,000 USD: no small investment or venture to say the least. For those who have access to that kind of capital, the masternode is hosted on a virtual private server (VPS) at a cloud facility, for example. A Linux system is needed (along with experience of using this OS) and there are decent and cheap cloud storage options available. Finally, the VPS server running Linux requires software to perform transactions including sending, receiving, and processing (or forging as those running masternode operations prefer it to be called).

Caution, before you start

Before you go diving into the masternode business it is important to note that like every other financial sector, this industry has scams, tricks, fraud as well. Be sure to thoroughly research your proposed venture first, and always be wary of those seemingly immoral sayings such as ‘how I earned 1000%+ ROI in days through masternode hosting’. If it sounds too good to be true, then it probably is!