What are masternodes?

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7 min read

Masternodes are a fundamental part of blockchain network services. It is a complete node capable of performing tasks and providing services connected to the blockchain. 

The main feature of these master nodes is that they can be executed through any user in exchange for holding a certain amount of coins specified in a contract. These coins act as collateral for each operation carried out by the master node.

In addition to allowing operations to be carried out on the blockchain, the master node allows the user, after its operation, to be part of the governance in the blockchain in which it acts among many other functions.

Origin of Masternodes

Masternodes date back to 2014 when Evan Duffield, an American software developer, developed the idea of adding a second level to mining. The design was called Xcoin and was first implemented in a Bitcoin Hard Fork. This Hard Fork is currently known as DASH (Digital Cash). 

 

One of the reasons for its success was the reduction of commissions. This new project also implemented a new decentralized governance system and a voting process that gave birth to DAO. But this was not the only thing that this new system brought us, as it included the possibility of generating a budget from rewards in a system called treasury.

The success of Duffield’s system caught the attention of many developers who decided to implement this new protocol in their projects. 

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How does a Masternode work?

The operation of a masternode or master node varies according to the implementation of its protocol in the blockchain in which it is executed. Masternodes generally operate through the Proof of Stake protocol. Through staking the owner of the master node can enable the creation of the node in question.

For the creation of nodes there are conditions, for example, that the owner of the node in DASH has 1000 DASH blocked. The funds will be blocked as a guarantee of the operation and actions performed by the node. The blocked currencies vary depending on the currency, for example, in PIVX the amount of coins to be blocked is 10,000 PIVX

It should be noted that not all nodes make use of Proof of Stake, some use Proof of Work (PoW). A clear example of masternode and Proof of Work is the MPower currency.

When our Masternode is active it enables functions such as InstantSend, PrivateSend, voting rights and governance. As mentioned above, all these functions will depend on the blockchain on which the Masternode is running. In the decentralized governance system the node operators have the right to vote on development issues on the blockchain they represent.


Rewards for masternodes


Through all these functions a reward is generated in the Masternode currency that makes it possible for the node operators to generate profits. As the participation in Proof of Stake or Proof of Work mining increases, the reward increases.

This type of nodes are a form of investment for many users who want to receive benefits. These benefits are explained through what we know as ROI or Return On Investment. This is the economic value generated by performing various economic activities. Through ROI we can calculate the return obtained through an investment.

Before starting to invest our money in a Master Node it is of utmost importance to know the ROI, since they represent a large investment. To get an idea, the initial investment in DASH is 1000 DASH coins, which is a considerable amount of money. It is therefore important to calculate the return on each coin. However, not all masternodes are expensive, since in other less known Altcoins we could create them for 100 €.

In case we want to calculate the ROI of a masternode we must do the following operation: We calculate the present value and the initial value of the investment. Then we subtract the original cost of the investment from the present value of the investment. The result is divided by the original cost of the investment resulting in the following equation:

ROI= (Present Value – Original Cost) / Original Cost

To calculate the gain in percentages we would only have to multiply the result by 100.

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MasterNodes features

Masternodes stand out for certain characteristics that make them unique. Among them, they offer improvements in the privacy and speed of transactions. In this way, they allow cryptocurrencies to focus on anonymity and increase the speed with which a transaction is processed.

Another important feature is that they have a strong barrier to entry. This barrier is the specific amount of cryptocurrencies needed to create the masternode. It should be noted that this feature makes it difficult to decentralize master nodes or Masternodes since not everyone can afford this cost.

There are other technical characteristics such as the fact that keeping a Masternode running requires a higher memory availability and an uninterrupted connection to the network. In terms of governance, Masternodes allow for a more efficient control and governance mechanism because the node holders can make decisions that affect the network.

Finally, Masternodes have a higher return on investment, as they offer better returns than stock rewards or loan services.

Are Masternodes public or private?

Most Masternodes are private, since their main objective is the centralization of financial operations and their privacy, even if this requires a large investment.

In case the Masternode holder user spends his locked coins it could mean the disabling or deletion of the Masternode. It is not necessary to store the amount of coins in the node, however, if they are stored externally they must be visible to the entire network. This ensures that each server has the right amount of master nodes, as inactive nodes mean an expense for the server owner.

 

Masternodes or master nodes can also be public. This occurs when the owner of the server where the nodes are hosted resorts to dedicated hosting on one of the nodes through the payment of a transaction fee. The latter option is usually used by traders who need cryptocurrency transactions without having to invest a large sum of money.