Masternodes in Crypto

Over the years, running masternodes in crypto has become one of the ideal ways to earn passive income. Some cryptocurrencies rely on a network of special nodes that do more than just store and validate transactions. These nodes are called masternodes, and they play a vital role in the governance, security, and efficiency of some blockchain networks.

Masternodes emerged as a way to incentivize node operators to invest more time, more money, and more resources into running the network. To run a masternode, one needs to deposit a significant amount of the respective blockchain’s native crypto as collateral. In return, masternode operators receive rewards in the form of cryptocurrency earnings.

In this guide, we’ll explore the concept of masternodes in detail, discussing what they are, how they work, and the benefits of running a masternode. We will also provide some tips on how to choose the best masternodes as well as give you a better understanding of how they fit into the larger cryptocurrency ecosystem.

What is a Masternode in Crypto?

A node in crypto is a computer or server that connects to a blockchain network and helps to maintain it by validating transactions and blocks. Masternodes, on the other hand, are specialized nodes that perform functions beyond just validating transactions. They are also behind the high speed of operations and the decentralization of some blockchains. While regular nodes participate in the consensus process by validating transactions and adding new blocks to the blockchain, masternodes perform specialized functions beyond just validating transactions.

At their core, masternodes are designed to help govern and maintain the integrity of the blockchain network. They perform a wide range of functions that regular nodes cannot, including facilitating instant transactions, participating in network governance, and providing specialized services such as hosting decentralized applications in some DeFi networks.

However, while masternodes are specialized nodes that perform additional functions on the network, they are not necessarily considered full nodes because they may not store a complete copy of the blockchain or validate all transactions and blocks on the network. Full nodes, on the other hand, are regular nodes that store a complete copy of the blockchain and validate all transactions and blocks on the network.

Generally, masternodes operate on a collateral-based system, meaning the operators need to own a significant amount of collateral to be held as a security deposit. Becoming a masternode operator requires a certain investment but in return, but, on the other hand, you stand to earn some consistent income. (We’ll cover some of the best masternodes for passive income later in this guide.)

Masternodes: How They Work

Masternodes in crypto act as servers on the decentralized blockchain network they support. They contain a complete copy of the blockchain ledger and are primarily designed to operate by providing enhanced functionality to a blockchain network. They are full nodes in a network that perform additional tasks beyond simply verifying transactions.

Masternodes in crypto “communicate” with each other and the rest of the network to ensure that transactions are processed correctly and efficiently. They are involved in the validation of transactions, the propagation of blocks, and the enforcement of consensus rules.

Typically, all masternodes operate using a collateral-based system, which means masternode operators must lock in their cryptos. In return, the operators receive guaranteed annual earnings in the form of coins for their services, helping to ensure that the most important nodes on the network are financially motivated, which in turn helps to improve network stability and loyalty.

Functions of Masternodes

Masternodes are responsible for enabling advanced features, which vary depending on the blockchain. A key point to note here is that not all blockchains use masternodes, and they don’t all function in the same way.

Below are some specific functions of a masternode:

1. Transaction validation: Masternodes verify and validate transactions on the blockchain.
2. Block validation: Masternodes validate newly created blocks on the blockchain to ensure they meet the network's consensus rules.
3. Instant transactions: Masternodes are responsible for enabling faster transactions.
4. Decentralized governance: Masternodes are often involved in the governance of the cryptocurrency network, allowing operators to propose and vote on changes to the protocol.
5. Coin mixing: In some privacy-focused blockchains such as Dash, masternodes are responsible for mixing coins, which helps to maintain the anonymity and privacy of users on the network.

Overall, masternodes play an important role in the operation, security, and governance of the blockchains that use them. All masternodes have different features depending on how they are configured, but they all perform the same functions across different blockchains. Operational masternodes are always in sync and they collectively serve as the source of information for any user interacting with the blockchain. And, in the event of any glitches in the blockchain network, masternodes are the first ones to detect them.

Differences between a Masternode and a Regular Node

A regular node is a computer that connects to a blockchain network and helps maintain it by validating transactions and blocks. It checks whether transactions meet the network's rules, verifies the digital signatures, and confirms that the transaction isn't a double-spending attempt. It also receives new transactions from other nodes and broadcasts them to the network.

As we’ve discussed throughout this guide, a masternode is a specialized node that performs additional functions on the network.

Note that neither a regular nor a masternode can add blocks to the blockchain. Here’s a snapshot of the main differences between a masternode and a regular node.

What are the Benefits of Running a Masternode?

Running a masternode can provide several benefits to node operators, including:

1. Passive income: Rewards for masternode operators in crypto are guaranteed, they earn even in a bear market.
2. Investment opportunity: By holding/locking crypto as collateral for a masternode, operators have an investment in the network and can benefit from the potential appreciation in the value of the cryptocurrency.
3. Voting rights: Masternode operators participate in the governance of the network by voting on proposals and making decisions about the future direction of the project.
4. Faster transactions: Masternodes are responsible for instant transactions and transaction validation, which can speed up the processing of transactions on the network.
5. Increased security: Masternodes help to increase the security of the network by validating transactions and blocks.
6. Decentralized governance: Masternodes help to ensure that the network is governed in a decentralized manner.
7. Community involvement: Running a masternode can also provide an opportunity for community involvement in a blockchain project and can allow individuals to support projects that align with their values and interests.

How Much Does a Masternode Cost?

The cost of running a masternode varies depending on several factors, such as the cryptocurrency network, the price of the cryptocurrency, and the hardware and operating costs.

To become a masternode operator, an individual must own a certain amount of the cryptocurrency of the network in which they wish to participate. This amount is usually held as collateral and is required to prove the operator's commitment to the network. It varies depending on the network and can range from a few hundred to tens of thousands of coins. Once the collateral is locked, the operator is free to set up their masternode.

The operator also requires a dedicated server or VPS (Virtual Private Server) to host the masternode software along with a guarantee of 24/7 uptime. The cost of a VPS can range from a few dollars to hundreds of dollars per month, depending on the provider and the specifications.

Other costs to consider include internet and electricity bills, as the server needs to be connected to the internet and running 24/7, which can increase electricity consumption.

How to Set Up a Masternode

When setting up a masternode, you can opt for either a hot or cold masternode.

How to set up a hot masternode

1. Set up a VPS or dedicated PC.
2. Download the wallet to your remote server.
3. Launch the wallet and wait for it to completely synchronize.
4. Send the specified amount of coins to your VPS wallet address.
5. Configure your wallet file accordingly and make sure you’ve encrypted and backed up everything.

How to set up a cold masternode

1. Set up two wallets—one for your VPS server (hot wallet) and one for your local machine (cold storage).
2. Download the wallet to your local machine and launch it.
3. Create a receiving address for the masternode collateral funds on your cold storage wallet.
4. Send exactly the specified amount of coins to the receiving address you just created.
5. Wait for the transaction to be confirmed on the blockchain.
6. Configure your cold storage wallet file accordingly and make sure you’ve encrypted and backed up everything.

List of Coins on Masternodes

As we mentioned earlier, not all blockchains use masternodes. According to CoinMarketCap, there are 138 masternode coins (as of April 2023) with a combined market capitalization of about $1.42 billion.

Best Masternodes for Passive Income

Masternodes are a great way to earn passive income in the crypto market. Here are the best masternodes for passive income:

Masternode Rewards

As with earning in DeFi, masternode rewards vary depending on the cryptocurrency network. In general, masternode rewards are calculated based on a percentage of the block reward for each validated transaction. This percentage can range from 1% to 100% depending on the cryptocurrency network.

Some networks distribute rewards multiple times per day, while others  may only do it once a day. The specific approach to distributing rewards to masternode operators varies among different networks, but the general idea is that you receive a portion of each block reward for verifying transactions and enabling specific functions on the network. The masternode rewards may depend on the crypto’s block time, the number of masternodes (or service nodes) on the network, and the emission curve.

How to calculate the ROI of a Masternode

Typically, most masternode operators consider the return on investment (ROI) as the ideal metric to determine the profitability of operating a masternode. If you want to calculate the ROI for a given masternode at a specific point in time, the following formula will be useful.

ROI = (block reward * blocks per day * 365 * current price * masternode share) / (masternode cost * coins per masternode)

Where:

• Block reward is the number of coins awarded for each block added to the blockchain.
• Blocks per day is the average number of blocks added to the blockchain per day.
• Current price is the current market price of the crypto in USD.
• Masternode share is the percentage of masternodes on the network owned by the masternode operator.
• Masternode cost is the cost of running a masternode.
• Coins per masternode is the number of coins required to run a masternode.

Note that a masternode’s ROI can fluctuate based on various factors, including changes in block rewards, network difficulty, and market conditions.

Final Thoughts on Crypto Masternodes

If you’ve ever wanted to earn passive income in crypto, then masternodes could be the way to go. A masternode is a special node that supports a blockchain network and earns rewards for its service. In return, masternode operators receive steady and guaranteed rewards for their services to the blockchain.

With that said, running a masternode is not a trivial task. It requires a significant investment of capital and time and is not without its risks and challenges. If you intend to become a masternode operator, always conduct thorough research on the different masternode coins and their requirements before choosing to operate a masternode.

As with trading and investing, always do your own research to ensure that you understand the advantages and disadvantages, costs, and requirements of running a masternode.