Masternodes are an essential element of the blockchain process. Due to the decentralized nature of the blockchain, it requires a greater number of these nodes, which are split up across the user base to distribute the workload.
Initially created for the DASH project, they act as a server of sorts, processing and completing unique and complex functions, including keeping copies of the blockchain, performing instant transactions, and participating in governance and voting.
While not all tokens utilize this system, there is a notable subset of projects that rely on its abilities to maintain their network and power their services.
How do Masternodes Work?
Masternodes play an important role for the blockchain as a sort of consensus model. They perform, save, and store all transactions that are made. These come in the form of blocks, which are first checked for validity. If they are accepted, the blocks are saved and stored to then be broadcast to other nodes.
As they hold full copies of the blockchain and push new blocks onto them, they can require a lot of computational power. This does, however, vary by project, with some being less resource heavy. What can be a major issue is the need for a constant, 24/7 internet connection.
In return, those running them are rewarded with tokens and other benefits. The nodes sit in a queue where they can be randomly selected to get a reward for their services.
Some projects use a mixed approach, with both mining and a node system powering different elements of their service. This means that the equipment required for running a masternode would need to be more powerful than for a project that uses just PoS for example.
A certain amount of collateral, usually in the form of coins, is necessary up front in order to get up and running. This will be locked up while it is in operation. The amount required differs between projects and ultimately helps ensure that those operating them will not act maliciously, as they will otherwise lose their locked currency.
Finally, masternodes provide some extra benefits above the typical nodes used for blockchain. These include added privacy for transactions, the ability to perform instant transactions, the ability to vote and for governance, and enabling the treasury and budgeting system in cryptocurrencies.
Requirements for Running a Masternode
There are some general requirements for running a masternode. This is the standard for the majority of projects.
To host, a certain amount of collateral is required. This usually comes in the form of coins. How many and what currency varies from project to project.
VPS or Servers
A VPS or server is needed to host the wallet containing the collateral.
Fixed Internet IP Address
Every masternode needs have its own unique IP address. This must be publicly accessible.
Masternodes are required to be stable and constantly connected to the network to play their role in securing the network and generating revenue.
Who is Powering Them?
For the most part, running a masternode is quite difficult. While anyone is allowed to set up and run one, there are certain barriers to entry that make it not feasible for a mainstream audience, instead relying on a smaller, dedicated user base.
Some projects offer a limited number of masternodes. To maintain a level of decentralization and focus on users, it is necessary to hold a certain amount of coins, for a certain time in order to run one, which varies depending on the project.
There are a number of constraints relating to the need for stronger hardware, more memory, and a constant internet connection. For Tomochain, for example, the processing of transactions is mostly CPU bound, necessitating at minimum a 16 core CPU and 32GB of RAM. Maintainance must also be performed as necessary.
Then there are the associated costs of electricity and maintenance that add to the costs, typical for Proof of Work blockchains. It is also a more long-term investment. As such, it is not a possibility for everyone. They are, however, not location dependent and can be set up anywhere around the world. This is as long as a stable internet connection is available, as they need to stay connected to others in the network to perform their function.
Despite the energy and power that goes into running one, people still choose to do it voluntarily. There are several reasons why someone would want to do this, whether it be a contribution to the growth of blockchain technology or as a hobby. Perhaps the biggest reason is that it is incentivized. People that perform these functions are provided with discounts and coins for their trouble. There are a number of factors that impact the rewards received, and so it differs for each project.
With all things considered, masternodes are only seen as suitable for enthusiasts who want to contribute to the blockchain and projects. It requires a significant investment in equipment, money, and time. If done properly, however, it can be worthwhile.
Different Types of Nodes
There are several different types of nodes in operation that serve different functions in the blockchain. Each project will have different types and combinations of these nodes in the network. Apex, for example, has three different types.
This type of node is in charge of validating transactions across the network, as well as resolving consensus related issues in a democratic manner.
These are regular nodes that participate in the voting process and keep supernodes in check.
Data Cloud Nodes
Data cloud nodes are a distributed off-chain network that play a critical role in the storage and management of the consumer data across the network.
Choosing a Project
Perhaps the most difficult part is selecting a project. Due to the large investment necessary to get up and running, it is important to choose one that is secure, reliable, and a provides a good return on investment. There are a few websites that offer insight into projects that utilize this masternode model.
Much like any investment, due diligence is key to getting the most out of a project. Checking the costs, ROI, and other factors is an essential process. After a potential project is found, it is worth visiting the website to see the roadmap, and Github to see if the devs are active.
Other than that, it can be worth checking whether there is an active community, as well as, seeing the general sentiment of the project on social media channels. After these steps, if all looks positive, then the user should go to an exchange like KuCoin to buy the project’s coins to get started.
As mentioned before, there are several advantages to running a masternode. There are some services that provide details about blockchains that can be used for research purposes when choosing a project.
Return on Investment
This is one of the main advantages. The investment comes in the form of time and money, so that is an important consideration when seeing if it is worthwhile. Due diligence is key to selecting the best projects with the biggest returns.
They are a fundamental element in maintaining a decentralized network. Having a large number will mean that there are more copies of the blockchain available, which in turn makes it more difficult to manipulate.
Open to All
At least on paper, they can be run by anyone. There aren’t any specific rules on who can run one or where they can be set up, making it a more democratic model. Some can also be run through the cloud, further reducing the necessary workload.
Alongside the positive aspects of running a masternode are some negatives. Here are some things to consider before setting one up.
Unfortunately, a small subgroup within the crypto community looks to take advantage of potential runners. These usually involve a fake project looking to collect ‘collateral’ money or something similar, only to disappear.
Barriers to Entry
Despite being open to all, there are several barriers to entry. These include technical knowledge and maintenance and equipment costs. They also tend to require a large amount of collateral to be locked up in order to get started. This can greatly reduce the pool of people willing to set one up.
Fluctuations in Value
When the price of the currency fluctuates, these rewards could potentially fall in value. The percentage of profit is never the same when exchanged to USD due to the volatility that can be experienced in the crypto market.
A Unique Solution
Thanks to the use of masternodes, it is possible to keep the blockchain decentralized and dispersed across a large network. In terms of decentralization and democratization, this is a great model.
It takes a lot of knowledge, equipment, and upfront costs to start out, but can potentially offer a big return on investment. Due diligence and research should be a priority to ensure that it is worthwhile, however.
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