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Masternodes are operators on a blockchain network who get more responsibilities, but also more rewards, than other node operators.
Masternode operators will generally look at their role in two different ways.
For some, it's an important way of helping to secure and manage a cryptocurrency network, taking on an important job in exchange for fair pay.
Others see it more as an investment, where they pay a certain amount upfront to buy a masternode and then receive ongoing cryptocurrency income as their masternode pays out dividends.
But first, what actually is a masternode and what does it do?
Masternodes are a feature of some cryptocurrencies. They're similar to a type of miner with special privileges and responsibilities, and extra rewards, and will often run alongside regular nodes.
For example, Dash (which was the first cryptocurrency to introduce the masternode system back in 2014) has a system that uses "proof of service" masternodes alongside regular proof-of-work miners.
The functions and responsibilities of a masternode can vary between cryptocurrencies, but often include the following:
Operating a masternode will generally require a certain amount of time, money and know-how.
In return for providing these, a masternode will be rewarded with cryptocurrency. These rewards are partly to compensate for the cost of running a node and partly to act as payment for the job.
Because masternode operators are important and powerful elements of blockchain networks, both the payments and collateral requirements encourage node operators to act honestly and in the best interests of the network.
At a minimum, masternode operators will typically need to do the following:
Beyond that, there is usually little requirement for a masternode to do anything other than keep their server running, their collateral available and their node up to date.
It primarily runs itself once it has been set up, which is part of the reason why many people see masternodes as a "set and forget" scheme.
Although it's possible to earn a passive income hosting a masternode, the returns will depend on the following:
One of the main upsides might be that you don't have to actually spend the collateral to start a node. You just have to have it, and you can sell it whenever you want. As such, losses will typically only be incurred if the value of a cryptocurrency falls between the time you buy collateral for a masternode and the time you sell that collateral – as long as the masternode runs long enough to offset the hosting and similar costs.
One of the simplest ways of looking at it is to ask whether the monthly returns of a masternode are enough to cover the cost and hassle of hosting.
A Dash masternode requires 1,000 DASH in collateral. As of 29 January 2019, that's about US$66,000 in collateral – the bare minimum upfront cost. In return, node operators earn an average of US$400 per month, or US$4,800 per year at current prices.
This is currently equivalent to an average return of about 0.6% per month or 7.2% per year on a US$66,000 investment.
Now let's factor in the time and monetary costs of running a node. Let's assume you use a mid-priced third-party masternode host at US$10 per month and just provide the collateral.
This doesn't do much to affect the overall picture, except it bumps your monthly returns down to about US$390 equivalent, or about 7.1% per annum. Factor in the costs of converting your Dash to fiat and withdrawing it, and you might expect to lose about 1% of earnings in the process – depending on which exchange you use and how much you withdraw at once.
On the whole, the returns on Dash masternodes are within a couple of percentage points of high-risk traditional investments.
But at the same time, Dash prices have swung by over 3% within the last 24 hours at the time of writing (January 2019). Cryptocurrency is so volatile that the exact time – down to the hour – that you cash out your masternode earnings has a bigger impact on profitability than any other factor.
Typical cryptocurrency volatility is the most significant factor when considering masternode profitability. If crypto prices rise, masternodes are more profitable. If they fall, masternodes are less profitable.
In the case of Dash – at least at the time of writing – the average returns are more than enough to cover the cost of a VPS, and even the hassle can be accommodated for by using a third-party masternode hosting service.
These tend to run for far less than the masternode payouts, often going for around US$10 per month, and you will usually be able to keep your collateral in your own cold storage wallet while using a third-party host.
If you don't have the required collateral, it's also possible to find pooled masternode services where individuals contribute a small amount of the whole, pooling their collateral and dividing the earnings accordingly. Note that these might require you to give someone else access to your collateral, which should always be approached with extreme caution.
That you are able to sell your masternode collateral as desired, and generally don't have to lock it in for any set period, makes a crucial difference to the risk and reward picture of masternodes.
The following are some of the world's most popular masternode cryptocurrencies.
Cryptocurrency | Required collateral | How it works | Learn more |
---|---|---|---|
Dash | 1,000 DASH | Dash masternodes earn 45% of Dash block rewards for facilitating additional network features such as instant transfers. | Learn more |
Stratis | 250,000 STRAT | Stratis masternodes earn rewards by expanding network functionality. For example, by acting as tumblers to allow for more private transactions. | Learn more |
Zcoin | 1,000 XZC | Zcoin masternodes, known as Znodes, verify transactions on top of miners for additional network security. 30% of the reward from each block goes to one Znode at a time through a rotating queue system. | Learn more |
ChainLink | Varies | No collateral is required to run a ChainLink masternode, but having collateral will allow a ChainLink masternode to serve as a more trusted node, offer additional functions and earn more. | Learn more |
PIVX | 10,000 PIVX | PIVX masternodes serve as consensus nodes alongside regular stakers, but earn higher rewards and get to vote on network changes. | Learn more |
NEM | 3,000,000 NEM | NEM supernodes are the highest tier consensus nodes. Suitably collateralised nodes that meet certain standards (low ping, high bandwidth etc) in constant testing will automatically earn supernode nodes. | Learn more |
VeChain | 25,000,000 VET | There are 101 manually selected VeChain masternodes who select block producers. They are hand-picked from those who contribute to the VeChain ecosystem in some way beyond just running a node. | Learn more |
The benefits of operating a masternode include the following:
However, the risks include the following:
It's possible to make money with masternode cryptocurrencies, but you'll still have to contend with the usual volatility of cryptocurrency and some additional risks beyond that.
It's important to make sure you've done your research and to have a complete understanding of a cryptocurrency's requirements before committing to a masternode.
Picture: Shutterstock
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