What is a Masternode? How does it work and what are the benefits of a Masternode?
A Masternode is a full node (typically a high-performance server or computer) responsible for sorting and verifying transactions on the blockchain network.
Blockchain has become a widely adopted technology with applications in various aspects of life. Along with this development, many unique aspects of blockchain have emerged that not everyone can fully understand.
In the previous article, we explored the essence and functioning of a node in the blockchain. Today, I will continue to guide you in delving deeper into Masternodes - an equally important element in this network.
So, what is a Masternode? What sets Masternodes apart from regular nodes? Let's explore this term in more detail in the following article!
And I'm Neo — Admin — Community Manager of Optimus Finance and Growth Marketing of LECLE Vietnam. Let's get started!
1. What is a Masternode?
A Masternode is a full node (typically a high-performance server or computer) responsible for sorting and verifying transactions on the blockchain network. As a full node, the Masternode also has the function of network governance through voting.
The concept of Masternodes was introduced and implemented by the Dash (DASH) project in 2014, where the separation of miners and Masternodes was intended to increase transaction speed. Nearly 6 years later, the Masternode market has reached a value of over 1 billion USD with more than 160 different coins implementing Masternodes on the blockchain network.
Note: Not every blockchain has Masternodes. You can check the Masternode coins here.
2. How does Masternode work?
Similar to full nodes in the blockchain network, Masternodes can be operated by anyone. However, to ensure they are not easily susceptible to hacking, these platforms all have stringent security measures in place. Specifically, to meet the requirements for running a Masternode, individuals must commit or stake a certain amount of coins/tokens.
That's why there are few cases of Masternode operators engaging in fraud because they are stakeholders and control the entire blockchain network. If fraudulent activities occur on the system, these individuals are likely to face penalties in the form of devaluing their own HODLings.
3. Benefits and risks of Masternodes
In reality, Masternodes offer many opportunities for both investors and projects but also carry potential risks.
3.1. Benefits
For Masternode operators:
They can generate income through rewards if they become a Masternode.
For projects:
The network becomes more secure because those chosen to be Masternodes are carefully selected.
3.2. Risks
For projects:
The network may appear more centralized because only a certain number of Masternodes have the authority to determine the validity of transactions.
For Masternode operators:
They may suffer significant losses if they choose a scam project or fail to exit before the project collapses.
There is a risk of capital loss due to the inflationary nature of the token, which can cause the token's price to decrease.
4. How to become a Masternode?
Typically, projects that implement Masternodes will always have a fixed number of Masternodes in the network.
If the network has reached its maximum number, individuals can simply set up their Masternodes and wait for their nodes to be elected as Masternodes.
To become a Masternode, the specific requirements may vary from project to project, but in general, there are some minimum requirements such as:
Holding a certain amount of coins.
Having a powerful server with a static IP.
Operating continuously 24/7 without interruption for any reason.
Once selected as a Masternode, individuals will receive rewards (which can include block rewards and transaction fees) for network verification.
This reward is what many people refer to as passive income when running a Masternode.
For instance:
To become a Masternode in the Dash blockchain, investors need to own 1,000 DASH tokens.
TomoChain has a fixed number of 150 Masternodes for the entire Tomo blockchain network, with a minimum requirement of holding 250,000 TOMO tokens to become a Masternode. Additionally, individuals need a sufficiently powerful server with a static IP, and this server must not experience interruptions. If it does, in the next epoch, individuals will be removed from Tomo's Masternode and will have to wait for re-voting. When you become a Masternode, you can earn rewards in TOMO.
5. The differences between Masternode and Staking
Many people ask, 'What's the difference between holding a certain amount of coins and staking?' So, what is the difference between Masternode and Staking?
In essence, running a Masternode is a form of staking, but it's more challenging to access because:
When staking, you simply need to keep the coins in your wallet and earn rewards daily without worrying too much about technicalities.
With Masternode, you need to lock up a substantial amount of valuable coins (which cannot be moved out of the wallet) and set up a powerful server that operates continuously without interruptions.
Just the requirement of holding a significant amount of coins is already a substantial barrier for many.
Therefore, Masternodes are typically intended for holders who plan to keep the coins for an extended period and want to contribute to the security and development of the network.
6. Some Frequently Asked Questions About Masternodes
6.1. Does Masternode make the token price increase?
In the short term: Yes.
In the long term: Not necessarily.
Initially, Masternodes can be a great reason for reducing the token's supply. According to the law of supply and demand, if demand remains constant or increases while the supply decreases, the price is likely to rise, right? However, in the long term, it's not guaranteed because there are many factors needed for a coin to increase in the long run.
For example, factors like:
Inflation rate When Masternodes operate for a while, they generate inflation (rewards for Masternode operators). Some projects have a very high inflation rate to attract Masternode operators. If the demand for the token does not surpass the inflation rate, it can lead to the token's devaluation over time.
You can check the inflation rate of coins using Masternode.Online. In the ROI column, the higher the ROI, the higher the monthly inflation rate of that token.
6.2. Is it worth investing in Masternodes or not?
Masternodes are a game for those with large capital and experience in the market who know how to choose the right coin to run a Masternode. If you are a newcomer or have limited capital, I think you should not invest in Masternodes. Instead, you can invest in ICOs, IEOs, or trade coins, which may be a healthier option. I'm not saying it's easier, but it's better for you, with less risk if you have sufficient knowledge.
6.3. What should you do when starting to participate in running a Masternode?
To begin operating a Masternode, you can consider the following steps to effectively carry out this process and achieve profitability:
Research and understand the development team: The project's development team is crucial in determining the project's viability. Investigate whether the team is actively executing the roadmap they have laid out, as this will help you decide if it's a suitable platform to invest in.
Thoroughly investigate the project: Gather comprehensive information about the project through its social media channels such as Twitter, Telegram, Discord, and more.
Pay attention to profitability ratios: Be mindful of the profitability rates and consider the percentage of rewards allocated to Masternodes."
These steps will help you make informed decisions when starting your Masternode venture.
6.4. How much money can you earn by running a Masternode?
The profit you can earn from operating a Masternode varies depending on the specific project and various factors. Therefore, it's not possible to accurately estimate the exact amount you can earn from running a Masternode.
Furthermore, during the process of running these nodes, the token price can fluctuate, either increasing or decreasing, so the profitability may also change over time.
The key is to choose a suitable coin project for Masternode operation, considering the rate of return on investment compared to the initial capital you put in to achieve the best possible efficiency.
In reality, there are many crypto projects in the market that allow you to run Masternodes, but not all of them guarantee potential profitability. In fact, some projects offer such minimal rewards that they can lead to losses and may not be sufficient to cover the expenses incurred.
7. Closing thoughts
Masternode is one of the crucial elements in a blockchain network and can be operated by anyone who meets certain conditions. Additionally, Masternode offers potential profits to operators through the rewards provided by the project. However, investors should also consider the potential risks when aspiring to become a Masternode on a particular platform.
If someone advises you to invest in Masternodes, it's best to proceed with caution because the odds of making a profit are often low, while the risks can be substantial. Don't focus solely on the potential gains and overlook the possibility of significant losses!
What about your thoughts? If you want to know further about it, don’t hesitate to share it with us! 😀
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