What is a masternode

At first, blockchains functioned only through the Proof of Work consensus system. This extremely secure consensus, unfortunately, quickly demonstrated certain limitations both in the ability to manage multiple transactions and in the estimated energy consumption.

To solve this problem, the developers thought about new consensus models, such as Proof of Stake (POS). It is within the framework of this consensus that masternodes come into action.

Indeed, masternodes, or main nodes, are computer servers whose task is to ensure the proper functioning of the blockchain in Proof of Stake. They will keep a copy of the entire block chain, as well as verify new transactions passing through the network. In return, the participants who manage these nodes are rewarded with new elements created for each block.

The first cryptocurrency to implement this system was DASH in 2014, today many blockchains are listed on Coinmarketrate.com , work on this algorithm.

How the masternode works

As you have already understood, masternodes are part of the consensus family in Proof of Stake. As a result, they work by placing a certain number of cryptocurrencies that act as collateral for their functioning. For example, for the DecimalChain masternode to work, where it is necessary to collect 1000 DEL.

After buying tokens, the user will have to deposit funds into the wallet of the cryptocurrency for which he wants to use the masternode. Then two methods are available to him: either the user decides to manage the server on which his node will be hosted, or he turns to a specialized company.

Once a node is online on the network, regardless of whether it has hosted it itself, or has passed through a third-party service, the latter will participate in verifying transactions that pass through the network. To reward him, the network will assign him newly created tokens for each block whose transactions have been confirmed, and this type of income is usually called a reward.

How to install a masternode

Technical skills will be required to set up the masternode. Indeed, each cryptocurrency will have certain features of installations that will need to be restored in the official documentation. We will still show you the main stages of the masternode implementation.

First, the user must receive the amount of tokens needed to be used as collateral. In this case, use your favorite trading platform.

Then you will have to rent a Linux server from a VPS provider. After the server is purchased, the user will need to download the cryptocurrency wallet for which he wants to use the masternode.

After the wallet is installed, you will need to send the necessary funds to it as collateral. After setting up the masternode, the wallet will have to synchronize the entire block chain, and only after that it will begin to participate in the transaction verification process.

However, the user must remain vigilant and ensure that his masternode meets the minimum uptime conditions (working hours) in order to receive a reward. Most often, the node must be online at least 92% of the time. In addition, the masternode operator will have to closely monitor network updates and deploy them in a timely manner in order to continue receiving rewards.

In other words, you should be careful and have time to devote yourself to working with masternodes: offline management is not always as easy as it seems!

As you have already understood, setting up a masternode requires many technical skills, mainly related to using a Linux server. In addition, constant vigilance will be required to complete maintenance tasks in the shortest possible time.

In addition to the difficulties associated with the deployment of the masternode, in many cases the entry threshold is set relatively high, since this requires the purchase of a large number of tokens. For example, for the DASH masternode, 1000 coins are needed to qualify for the validator position: a trifle of 174,382 US dollars! In other words, not everyone can afford to get into the business with masternodes alone.

Why invest in a masternode

Now that we’ve learned what masternodes are and how to configure them, you’ll probably be wondering what it gives you:

• Contribute to the network

Firstly, using a masternode will allow you to participate in the life of the network. Indeed, by managing the masternode, you will help verify transactions and, consequently, work on the security of the blockchain.

In addition, in some cases, your masternode also gives you rights regarding the management of the blockchain. Thus, you may potentially be asked to vote while making an important decision about the future of the network, and possible modifications to its functioning.

If you’ve always wanted to participate in the verification process and contribute to the decentralized building of cryptocurrencies, masternodes are a great starting point.

• Get passive income

Another point, which in most cases is the main reason for the operation of the node, is the financial aspect. Indeed, according to the same credo as mining, the use of masternodes will allow you to receive passive income in cryptocurrencies.

As we have seen, masternodes allow you to generate rewards when they check new transactions in blocks. For example, using the Horizon node will give you an 18% annual return on investment. This amounts to about 0.6 ZEN per month or about $8 monthly profit at the current price.

Obviously, like any investment, masternodes involve risk. Indeed, buying collateral is an investment, and its value can vary greatly both up and down due to price volatility in the crypto sphere.

With such an abundance of cryptocurrencies, the list of projects using masternodes is also extremely large. Here is a small and far from complete list of projects using masternodes:

• Dash (DASH)
• DecimalChain (DEL)
• Zcoin (XZC)
• Ernergi (NRG)
• Divi (DIVI)
• Syscoin (SYS)
• Pivx (PIVX)
• Horizen (ZEN)
• ZelCash (ZEL)
• E-Sport Betting (ESBC)
• Polis (POLIS)
• Phore (PHR)
• Bitgreen (BITG)
• Zcoin (XZC)
• SmartCash (SMART)

The main criteria for studying

Before choosing a masternode, it is important to analyze various parameters to make sure the profitability and duration of the investment.

1. Development Team: Research the development team. What is disclosed on the site? Is it qualified?
2. Community: Is there an active community for this cryptocurrency? How active is the project community?
3. Goal: Does the project have a specific goal or innovation? How popular can it become?
4. Liquidity: is the project liquid? For example, does he have a good trading volume on different platforms?
5. Software: Does the crypto project offer a periodically updated wallet?

Independent or bonded masternode?

Now that you have decided what a masternode is and have done all the necessary research, you will have to think about whether you are going to place the node yourself.

If you have already rented and used a Linux server in your life, or you have time to devote it to servicing your nodes, trying a “home” startup may be an option.

However, if you do not have technical skills or you do not particularly want to take the initiative, it is enough to use the DecimalChain blockchain project.

Own or shared masternode?

If you choose a third-party service, a new question will arise: which is better: to invest in a full masternode or to share it with others?

If you have already tried the adventure with masternodes, or are willing to invest a significant amount of money, you can choose full masternodes.

Conversely, for the first experience or in the case of a small contribution, it is better to choose common masternodes that will allow you to get acquainted with this world for the first time, while limiting the risks.

Finally, another strategy may be to participate in different shared masternodes in order to once again divide the risks between different projects.

Conclusion

With the growth of Proof of Stake, more and more investors are turning to masternodes to the detriment of traditional mining. One of the advantages is the liquidity of these solutions. Indeed, in the context of mining activities, equipment needs to be updated, and this step is often tedious and expensive in time and money. Conversely, to stop the activity of the masternode, all you need to do is stop the subscription to the hosting, and sell the collateral on the trading platforms.

In addition, thanks to projects such as DecimalChain, this process is simplified for beginners, and gives the opportunity to participate in the life of blockchains, without requiring technical knowledge, and without wasting time on setting up and maintaining the system. It makes masternodes a simple and inexpensive investment to generate profitable passive income.