A Guide to Masternodes

4 min read

If you think that the only way to earn money from cryptocurrency is to simply buy some coins, “HODL”, and hope the price sufficiently appreciates, then think again.

Already, projects have come up with a number of ways to reward their token holders, through such schemes as token dividends (for example, the ‘Gas’ that is paid to holders of NEO), staking rewards that are available in Proof-of-Stake projects, and airdrops.

But when assessing such reward schemes over a much longer forward time period, the most lucrative of all may well be the masternode.

But what exactly is a masternode?

Simply put, it is a server on a blockchain network. It runs software on the blockchain in order to provide several important functions for the network – functions that ordinary network nodes won’t usually perform.

In doing so, therefore, masternodes are considered the preeminent network nodes, and are amply rewarded in return.

For instance, in the case of Dash which was the first cryptocurrency project to introduce the masternode concept, these important functions include:

  • InstantSend – executing instant transactions
  • PrivateSend – executing anonymous transactions, specifically the coin ‘mixing’ process
  • Decentralized Governance – masternodes provide governance, while the blockchain funds development.
  • Voting – masternodes can vote on proposals, such as budgeting issues (a full list of proposals can be found here)

Because performing such functions costs money and resources, the masternode earns a sizeable share of the block rewards, which is usually paid in the cryptocurrency of the respective network.

But not every project offers the opportunity to run a masternode. It is more commonly found in those projects that use Proof of Stake (PoS) consensus mechanisms. Indeed, running a masternode is similar in concept to those nodes in PoS blockchains that stake their coins to earn rewards – and is done by simply locking your coins up in a wallet.

It should be stressed that masternodes are also increasingly appearing in Proof-of-Work projects (ones that involve mining). But irrespective of the consensus mechanism, the long-run benefit to investors of running masternodes is that they receive greater returns than simply mining (PoW) or staking (PoS).

Ultimately, a masternode proves a great opportunity for crypto investors to earn a passive income from their holdings. In some cases, this income can be substantial. It also allows those running the masternodes to earn crypto regularly without having to set up mining rigs.

So what’s the catch?

There isn’t one. But there are a few things to note. Firstly, running a masternode will require the user to stake a large number of coins on the network, which means you must hold a significant chunk of tokens in your wallet. Much like a PoS staker, doing so indicates you are a serious investor in the project, and incentivizes you to uphold truth on the network.

But it means that a hefty initial investment is required – if you don’t get in early when the coin is still cheap, buying the minimum masternode coin threshold (which varies for each project) can be expensive.

Dash, for example, requires 1000 coins to be collateralised to earn masternode rewards, but pays out an annual ROI of 7.5%. So, at current prices, where 1 DASH = $410, becoming a masternode will set you back $410,000, but will earn you $30,750 per year.

In contrast, when Dash first announced its masternode programme back in June 2015, the price of 1 DASH was under $3. That means a masternode would have cost you less than $3,000, and you would be profiting handsomely today.

So are there cheaper masternode options available now?

Yes! Sites such as masternodes.pro and masternodes.online provide extensive information about the latest projects offering masternode opportunities.

As these sites show, there are plenty of masternode projects, but of course, as with everything crypto-related, DYOR! (see our concise guide to crypto terms here!)Given that masternodes require you to purchase a large number of coins, scam projects will be particularly incentivized to offer such a scheme, as they can get rich quick and duly abandon the project.

That said, a growing number of credible projects are providing masternode programmes to reward their biggest token-holders, and thus definitely worth investigating.

masternode programmes

How much can you earn for running a masternode?

That will largely depend on the project you intend to buy into. More recently – and what seems likely to be a growing trend going forward – projects are offering highly tailored masternode programmes, with greater rewards dispensed to those willing to hold even higher coin thresholds.

In the example of VeChain (VET), token-holders can earn a new tradeable token (‘Thor Power’) for holding VET coins. For every 1 VET, you will earn 0.00042 Thor Power per day. But masternodes can earn significantly more:

  • Holding 10,000 to 49,999 VET qualifies you as a ‘Strength Node’ which is the lowest rewarded masternode
  • 50,000 – 149,999 VET enables you to be a ‘Thunder Node’
  • 150,000 VET allows you to be a ‘Mjolnir Masternode’
  • 250,000 VET gives you the chance to be an ‘Authority Masternode’, the highest masternode in the system

As you move up the masternode hierarchy, you can earn a greater proportion of Thor Power, while becoming an Authority Masternode means you also have the privilege of earning 30% of all Thor Power transactions.

Of course, your earning potential will also depend on how much your coin appreciates in value over time. So, it makes sense to choose a project that has long-term potential, such that in a few years’ time with steady growth, you could end up with a sizeable passive income, not to mention the coins you hold in your wallet which you can sell at any time (but of course in doing so, you will automatically relinquish your masternode status and benefits).

Again, it can’t be stressed enough that you should perform detailed research on a project before you invest potentially large sums up-front.

There are additional ways to boost your income even further. Take Waltonchain, which allows you to earn masternode rewards by holding at least 5000 WTC in its wallet. On top of this, the project also enables users to mine WTC, and if you mine to the same wallet that holds your 5000+ WTC, you can earn an even higher masternode yield.

What do I need to run a masternode?

  • A wallet – this can usually be downloaded from the project’s website, and is then synced with the blockchain.
  • A minimum number of required coins to be held in your wallet. Depending on the project, you will be required to keep this minimum locked away to continue receiving masternode rewards. For Dash, it’s 1,000; for Waltonchain, it’s 5,000; and for PIVX, it’s 10,000.
  • A masternode server or a Virtual Private Server installed with Linux: A typical masternode setup might use, for instance, an Ubuntu server hosted by the VPS vultr.com, which is a popular choice as they offer hosting for $5 per month and even accept payment in Bitcoin. Ideally, this computer should be operating 24/7 with near-continuous uptime.
  • A dedicated, unique IP address for each masternode. If you plan to run more than one masternode, more IP addresses will be required. But normally, the IP address will come with the server/VPS.
  • Each project requires you to follow some rather detailed steps to successfully set up the masternode. Setup instructions should be provided on the project’s website, so there’s no need to be concerned if you are not an expert in Linux.
Dr Justin Chan Dr Chan founded DataDrivenInvestor.com (DDI) and is the CEO for JCube Capital Partners. Specialized in strategy development, alternative data analytics and behavioral finance, Dr Chan also has extensive experience in investment management and financial services industries. Prior to forming JCube and DDI, Dr Chan served in the capacity of strategy development in multiple hedge funds, fintech companies, and also served as a senior quantitative strategist at GMO. A published author at professional journals in finance, Dr. Chan holds a Ph.D. degree in finance from UCLA.

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