Masternodes are part of the infrastructure of certain cryptocurrencies like Dash and PIVX. Masternodes offer many opportunities for both yield and the potential of capital gains. But before we understand what masternodes are and what kind of coins operate on a masternode system, we must understand what a node is.
**Interesting Fact: Recently, When entire crypto market went down to a market cap of $60 billion, Only masternode based coins were performing extraordinary, with providing decent profits even in such a bad time.**
The word node has tons of definitions but the one we’re concerned with goes as : “A physical network node is an active electronic device that is attached to a network, and is capable of creating, receiving or transmitting information over a communications channel.”
Oversimplifying, a node is a device, for example – a computer, in a network that is communicating with other devices – computers, in the same network. If a computer is a node, it implies that that computer is part of a specialized computer network.
When it comes to cryptocurrencies, masternodes can be thought of as the computer servers, setup to serve the users of a particular cryptocurrency. For example: In Dash’s case, the masternode system enables InstantSend, PrivateSend and the Dash Treasury System where as Crown Coin uses the masternode system to host decentralized apps amongst various other purposes. The BLockNet aims to use nodes to enable trustless exchange services.
The yield of a masternode system varies principally according to the masternode count. Each coin has different payout periods based upon the kind of masternode system it has.
How Do Masternodes Work?
A basic framework of the masternode system involves cryptocurrencies having a masternode system splitting the block reward between the miners, masternode holders, and the treasury.
The treasury is a pool of money which is funded through block rewards. It is used to fund proposals that in some way add value to the digital currency. It is the primary role of masternode to decide which proposals add real value and which ones do not. The proposals can be submitted by anyone on the chain. Some coins may even demand to a small fee to submit a proposal to limit spam.
After the masternode has chosen the proposals which show the capability to add real value and promise good returns, the masternode holders vote on them. If a proposal is voted in, they get paid automatically. Dash, is the most evolved cryptocurrency with its own voting portal DashCentral.org, where this entire process is carried out. Other currencies are still in the development phase of their own voting portals.
With people competing with each other to put forth the best proposals to improve the underlying cryptocurrency, masternodes become nodes running the same wallet software on the same blockchain just providing additional service to the network. According to the PIVX Masternode website, these services include:
- Anonymization – increased privacy of transactions
- Instant transactions
- A decentralized governance
- A decentralized budget system
- Immutable proposal and voting systems and much more….
For providing such services, creating more security and decentralizing the node network – masternodes are also paid a certain portion of reward for each block. This serves as a passive income to masternode holders minus their running cost.
The work through the masternodes improves the value of the currency, which in turn increases the value of the pot. Subsequently, the treasury increases, more proposals can be voted in and more members can be hired for the proposals. It is a chain reaction which moves in a symbiotic relationship with the yield from the masternode system. The yield mainly depends upon:
- The value of the coin at the time exchanged
- Frequency of payouts
- Cost to host the node
- Cost of the coins
Cryptocurrencies having a masternode system have a 2-tier system which is much different from Bitcoin’s primitive 1-tier system. Bitcoin lacks in a second governance layer that is equipped with performing specialized functions namely – conflict resolution, outreach and market, artist and developer involvement et cetera. It does not have the ability to make important decisions and resolve the differences between the factions that have risen strongly in the Bitcoin community.
In this manner, though Bitcoin was a technological breakthrough of its time, digital currencies on the masternode system have governance programmed into them in addition to the technological advancements making them a technological and a social breakthrough.
Which cryptocurrencies have master nodes?
- MUE – Monetary Unit Masternode
- Transfer Coin Masternode
- Excl Coin Masternode
- Helium Masternode (to be launched soon)
Here is the glimpse of the cryptocurrency – masternode database as seen on Invest It In.
Strengths and Weaknesses of the Masternode System
Masternode owners are a pool of investors which are very interested in the high success of that cryptocurrency. Also, masternodes manage a treasury fund which ensures the long-term viability of a crypto-project. Both of these factors focus minds on the long-term rather than cycles of pump and dump.
Third-party service providers can provide a hands-off solution to owning a master node. This would allow a non-technical investor to potentially become a master node as well.
The collateral related to any masternode fits on a pen drive and the capital backing a masternode has ‘unlimited’ upside potential. Also, the more the number of masternodes in existence, the harder it becomes to take down all of them – ensuring sustainability and security.
But nothing can be all rainbows and sunshine, and masternodes are no exception. They have their shortcomings and possess a risk for imminent threats as well.
First of all, the legalities of masternodes are unclear. Second, nodes are susceptible to Denial of Service (DoS) attacks. This occurs most often when they are host on cheap and weak hosting accounts. Also, since the value of the coin keeps on fluctuating, the price of hosting a masternode can be higher than the earnings from the coin.
Also, large coin amounts concentrated in the hands of a few could pose many risks to the coin. The masternode counts could be put into jeopardy if the whales (owners with heavy money/coin/masternode bags) decide to quit the coin and liquidate the collateral. Whales could also concentrate nodes in specific data centers and locations – this would make the cryptocurrency prone to physical or electronic attacks.
With the multitude of services masternodes aim to provide, they could face specific regulatory challenges. And the more the number of masternodes come online, the revenue generated by each masternode is reduced.
Right now, masternode systems are highly speculative. Sudden changes are bound to be unpredictable. The main reason masternodes are interesting to speculators is that they offer yield. These systems are evolving beyond the present blockchain technology with an entire community that is involved in adding value to the existing cryptocurrency infrastructure.
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