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What is a masternode?

Cryptocurrencies are often considered as investments, be that as trading against the volatility or holding for long term rewards should a particular coin or token become more popular. This isn't exactly what cryptocurrencies were created to be, where a world of decentralised finance has created a Utopian dream of a bankless, cashless society powered by the people, for the people.

Over the past 3 years, this dream has been somewhat pegged back, if not totally destroyed, after a year of crazy crowdfunding in 2017 via the ICO boom. Banks have turned their backs on those involved with cryptocurrencies, where the high street is almost completely unaccessible now and only a few niche bitcoin friendly banks provide suitable solutions for those going from crypto to fiat.

A lack of business expertise by many ambitious tech entrepreneurs has seen huge losses for those getting involved in cryptocurrencies at the ICO level with projects that were never likely to be successful and only a select few benefited from huge price spikes in early stage tokens.

Many exchange hacks in recent years have seriously hindered the growth of the industry and damaged the trust with mainstream press and consumers, with exchanges such as Binance failing to take proper responsibility for their failings in security, often washing their hands of serious hands and pushing it under the carpet as their loyal communities back them to the hilt. This has seen a massive growth for brokers like Relayed who's personal approach and trust sees businesses moving away from exchanges and going to these dedicated brokers.

So away from investing in crypto to see the price increase and make a return, what other ways are there to make money from cryptocurrencies?

Cryptocurrency Mining

We're not going to go into too much detail on mining so we can focus more on masternodes, but it's important to understand the difference between these two contribution methods. And that is one thing that is prevalent for both - contribution. Mining came to popularity in the early days of Bitcoin, where the theory of decentralisation was becoming a reality.

Mining Bitcoin was simply providing computing power to solve mathmatical problems and keep the network running without a central authority having control over that network. Buy why provide support to a network for free? As a way of encouraging participation, the network provides rewards for miners who are giving up power and also paying for electricity to do so.

The competition involved in what is called the consensus algorithm, ensures that the network is as fair as it can be, but it should be known that this competition on the Bitcoin network, and any other with a Proof of Work consensus, is extremely inefficient and environmentally damaging.

Moving on from Bitcoin and PoW, many other decentralised technologies now exist that also need contribution from the network in order to function, and this is where the masternode comes in.

What does a masternode do?

Masternodes are much like a full node on Bitcoin, a computer that holds the entire blockchain history and ensures network up time and authenticity of the data, but a MN has far more functionality and contributes in more technical ways.

Some contributions of masternodes include:

  • Supporting the privacy and security of transactions on a network
  • Increasing the performance and speed of transactions
  • Assessing quality of data
  • Maintenance of a network and preventing poor quality data

A masternode can be held by contributors to the network, be that an individual or a company and they are in no way limited to the above functionality. Each platform that requires masternodes in order to maintain a decetralised network, will be making use of utility tokens, owned by investors, platform users, miners and masternodes. These tokens will therefore be used as rewards to those running a MN.

How can I run a Masternode?

Every blockchain network has a responsibility to prevent bad actors from being in the network, where their sole purpose is to try and manipulate data for personal gain, which can result in massive loss of funds. When it comes to running a masternode, this is often handled by up front investment in the form of the utility token of the network, where any malicious intent from a participator would simply be counter intuitive.

The entry level for running a masternode can therefore be quite high for obvious reasons, but this also comes with the added benefit of making a return on the investment through supportive performance on the network.

Dash is one of the most popular masternode investment options and this comes with a 1000 Dash token requirement to participate. Various technical specifications will also be required to ensure the hardware and software are up to scratch to carry out the requirements on the network, which could range from a dedicated IP address to enough RAM or hard-drive space to store the entire blockchain.

There will always be some kind of upfront cost invovled in running a masternode, be that investing in the hardware, buying the required token allocation or setting up a dedicated server so understanding what kind of returns will be available on each network is going to be pretty essential before you get started.

How to earn from a masternode?

The returns for running a masternode vary greatly from network to network but with the initial stake required in order to get up and running, it's much like earning interest on a proof of stake network or like the good old days of banks who actually paid interest on your money.

By ensuring up time and performing well within the network, you will be rewarded with the cryptocurrency of the platform, often paid out at set intervals directly to the wallet on your MN.

To ensure you're getting an ROI it will be important to run the numbers and do some maths, which you can do yourself or with an experience cryptocurrency accountant, and ensure that your investment, running costs, electricity, servers etc all come out with some return for you.

It's not advisable you run a MN purely in the hope that the token will pump in price as this is significantly riskier.