What are Masternodes: Complete Guide

Masternodes have been around for quite some time, but have only recently begun to receive a good deal of attention. Masternodes, which are also known as bonded validator systems (we’ll stick with masternodes or MN), are servers that provide additional services for the blockchain that can’t be accomplished using Proof-of-Work.

The very first cryptocurrency to use masternodes was DASH. It called the new tier of masternodes its Proof-of-Service algorithm, and this second tier exists alongside the primary tier to achieve distributed consensus on the Dash blockchain.

The two tiers work together to ensure that PoW and PoS maintain the Dash network.

Dash may have been the first to use masternodes, but plenty of other cryptocurrencies have adopted the same model since. I’ve seen some estimates that claim over 300 cryptocurrencies are using masternodes as of August 2018.

While I’m not sure if that’s true or not, there is a website tracking masternode cryptocurrencies and it has just over 100 different coins listed.

Dash originally created the masternodes for instant and anonymous transactions, but they are being used for many other purposes currently.

So, let’s get deeper into masternodes!

How Do Masternodes Work?

Masternodes have some similarities to the Proof-of-Stake consensus mechanism in that they require a stake of a certain amount of currency within the network. This is because the networks require masternode holders to also hold a significant amount of currency before allowing them to establish a masternode.

Of course this makes sense because the large investment not only supports the network, it also ensures fair and honest behavior from the masternode owners.

How much currency are we talking?

Well, for Dash you need to have a minimum of 1,000 DASH to establish a masternode. As of August 2018 that’s just over $155,000. It’s actually a good time to establish a Dash masternode, because back at the beginning of 2018 it would have cost over $1 million.

So go get yourself a Dash masternode now before the price goes back up!

Let’s say you do have $155,000 laying around. Once you use it to buy 1,000 DASH you can stake it and start collecting some passive income.

You begin by downloading the core wallet of the currency so you can setup a masternode. You’ll need to run it on a computer that remains connected to the internet 24/7 and the wallet will need to remain open at all times as well. You could also rent a server if you like, or run the wallet on a VPS.

Once you have the wallet running with 1,000 DASH or more the wallet will integrate itself as a masternode in the network and you will begin collecting your passive income.

The masternode in the Dash network helps support some of the specialized features, such as instant payments and anonymous payments. It also allows for the decentralized governance that gives node operators the ability to vote on important changes within the blockchain.

It’s worth it to be a masternode.

Simply for running the masternode the owners receive compensation of 45% of the block rewards recovered by miners. An equal 45% share goes to the miner and the other 10% goes into a treasury fund (which is possible because of masternodes) which is used to make network improvements.

It’s important to stress that the minimum currency holdings are just one of the requirements for running a masternode. Each cryptocurrency has its own requirements and if even one is not met the masternode ceases to operate.

With all that in mind let’s look at what’s required to set up a masternode.

It actually isn’t all that difficult. You need:

  1. a VPS or server to host the wallet 24 x 7;
  2. a dedicated IP address for the server of VPS;
  3. some storage space to save the blockchain;
  4. a minimum amount of coins of that particular crypto. (For Dash MN you need 1000 DASH units and for PIVX MN you need 10,000 PIVX units) So this minimum number varies from crypto to crypto.

These are the pretty much same requirements for any masternode cryptocurrency.

The Benefits of Masternodes

One definite benefit of masternodes is that they work to protect from network attacks in the same way that traditional Proof-of-Stake does. As you’ve already seen with the Dash example, it’s expensive to accumulate enough currency to have a masternode.  This keeps the network more decentralized, as there simply aren’t many people who could afford to create a monopoly on nodes. It would just be too darn expensive.

And that cost also keeps the masternode operators honest. Unlike traditional Proof-of-Work miners who can simply switch coins based on profitability, the masternode operator has a huge incentive, in the form of their investment, to maintain their own masternode properly.

Masternode operators need to play fair if they want their investment to pay off.

Basically the combination of the high cost of entry, and the promise of their return on investment, keeps masternode operators from acting with malicious intent.

Masternode Use Cases

As mentioned before, Dash was the pioneer of the masternode. They developed it to implement the following blockchain services:

  • InstaSend: Masternodes accommodate nearly instantaneous transactions
  • PrivateSend: Masternodes allow users to make and receive anonymous payments
  • Decentralized Governance: Masternodes adjudicate and vote on technological and financial developments for the blockchain

Once Dash implementd masternodes, and other projects saw how useful they were, the use of masternodes spread. Some used the same services as Dash, while others came up with new and inventive use cases for masternodes.

This is not even close to an all-inclusive list, but here are some use cases and the cryptocurrencies using masternodes to accomplish what isn’t possible with traditional consensus algorithms:

Privacy

Dash set a precedent for privacy with its PrivateSend feature, and of course privacy-centric coins have been working to improve on that transaction anonymity. One such coin is PIVX, which began as a fork of Dash, but has since taken anonymity to even greater levels than its parent Dash.

PIVX has adopted a customer version of the Zerocoin protocol as its consensus mechanism. This is the protocol used by privacy coins like ZCoin.

With PIVX, users can opt to convert their standard PIVX tokens to zPIV tokens. These zPIV tokens anonymizes the users identity since there is no connection between zPIV tokens and transaction IDs. This yields a verifiable asset transfer through the PIVX masternodes, while also granting the user complete anonymity.

PIVX isn’t the only privacy coin using masternodes to improve privacy functions. Both ZCoin and Monetary Unit also use masternodes in their privacy functions.

Decentralized Exchanges

Masternodes are also finding use in decentralized exchanges, with projects such as Exscudo and Block Net supporting exchange functions. In these cases the masternodes will be used to oversee transactions. This is hoped to facilitate cryptocurrency trades as well as becoming a gateway for fiat currency exchange.

These are theoretical use cases currently, and there is no platform yet available to test how this might work.

Marketplace Services

For a decentralized marketplace experience look no further than the Syscoin project. They are using masternodes to allow for instant and anonymous payments in a peer-to-peer marketplace that is a blockchain equivalent of ecommerce auction sites such as eBay.

The decentralized marketplace is already functioning and can be accessed and tested on the Syscoin Blockmarket Desktop 3.0.

You can run your own Syscoin masternode by staking 100,000 SYS in your wallet. As of August 2018 that’s just over $10,000 to own part of what could become the blockchain equivalent of eBay and Amazon.

Smart Contracts

Masternodes can be used to run smart contracts and that’s exactly what BOScoin is doing. They’ve also copied the masternode governance system developed by Dash for their own Congress Network. This is allowing for better decision making within the BOScoin network.

The BOScoinmasternode owners are given voting privileges that allow them to make the decisions regarding policy modifications, code changes, and revenue allocation among other things.

In Conclusion

The potential applications for masternodes are quite flexible, allowing blockchains that use Proof-of-Work as a consensus mechanism to add additional features that wouldn’t be possible otherwise. It’s almost like a hybrid Proof-of-Work and Proof-of-Stake system.

One definite benefit it brings to Proof-of-Work blockchains is the avoidance of centralization. It also consumes far less energy than a Proof-of-Work mining system.

Masternodes bring enhanced network stability, and can also enhance loyalty thanks to the dividends and the high initial costs of taking a masternode position. Unlike traditional mining, it isn’t likely that operators will rapidly switch between coins due to their investment in the network.

The masternodes are even capable of keeping miners from attempting malicious actions. In the Dash system the second-tier masternodes monitor the first tier mining network. This allows the masternodes to have full control over rejecting blocks if a miner were to step out of line and try to manipulate block rewards.

Admittedly it is very early in the history of blockchain technology, so we don’t know how long masternodes will be valid. Currently they do appear to have the potential to create better democratization and decentralization within networks and blockchain communities.

For those who have the necessary capital they also promise a good investment, particularly when prices of cryptocurrencies are low as they are currently (August 2018). A smart investment in a masternode now could lead to a huge payoff in the future if the cryptocurrency chosen is one that lasts the test of time.

Featured image by Paul Olek

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