07 June 2023 • 8 min read
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.
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 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.
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:
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.
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.
|Type of Node||Specialized node||Regular node|
|Functions||Transaction validation, block validation, instant transactions, decentralized governance, and coin mixing.||Validating transactions and blocks.|
|Required Collateral ||Must hold a certain amount of crypto as collateral in order to participate in the network.||No collateral required.|
| Rewards||Masternode operators are guaranteed rewards.|
Not typically rewarded for their participation in the network.
Some blockchain networks may offer rewards to nodes that perform additional functions like crypto staking.
|Additional privileges||May have additional responsibilities and privileges on the network, such as decision-making and faster transaction verification.||Does not have additional privileges beyond validating transactions and blocks.|
|Storage requirements||May not store a complete copy of the blockchain, depending on the network.||May store a complete copy of the blockchain depending on the node.|
Running a masternode can provide several benefits to node operators, including:
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.
When setting up a masternode, you can opt for either a hot or cold masternode.
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.
Masternodes are a great way to earn passive income in the crypto market. Here are the best masternodes for passive income:
|Bitcoin Zero||20,000 BZX|
|Divi Project||10,000 DIVI|
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.
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)
Note that a masternode’s ROI can fluctuate based on various factors, including changes in block rewards, network difficulty, and market conditions.
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.