Masternode Running 101: Advantages and Disadvantages of Staking Tokens
If you are a crypto enthusiast, it is likely that you have already seen the term “masternode”, and maybe even a #masternodemebro hashtag on social media such as Twitter. This particular hashtag has started gaining more and more attention since July 2018, but it also brought more attention to masternodes themselves. For newcomers, this might be confusing, which is why we will now explain what is a masternode, how does at work, what does it do, and what are the advantages of running it.
Let's start with the hashtag, #Masternodemebro. It was started by Brian Colwell, one of the more vocal crypto enthusiasts, and it kicked off a competition for masternode owners. The competition was simple enough, and those who own masternodes had the ability to vote on which cryptocurrency has the best ones. It lasted several months, and it got divided into a few categories, depending on the cryptos' characteristics, market cap, and similar details.
The hashtag actually revealed the amount of interest in masternodes on Twitter, and for those who operate them — it demonstrated the superiority of the project or projects that they are backing. Winning the competition mostly meant additional attention to certain coins, but also a demonstration of what the community can achieve. However, it also revealed the popularity of masternodes as well, which was coming from nothing but pure interest in this aspect of cryptocurrency.
Eventually, the competition became big enough that even companies got involved, offering rewards to those who won, such as a free listing on certain exchanges, and alike. A project called Bulwark ended up being a winner, but the interest in masternodes goes well beyond a single project. Since then, Google searches involving masternodes became much higher than in earlier months.
So, what is a Masternode?
Technically speaking, a node is a device that can participate in a network and help maintain it. There are several types of nodes, including light clients, full nodes, and, of course, masternodes. Light clients usually have small capacity and can only store and access only certain parts of the network, while the full node can easily download the entire network.
As for masternodes, they are significantly different from both, although there are some similarities. Simply put, a masternode can be considered a full node, but it can also perform various specialized actions, and it has more responsibility within the network, but also more authority. They are also sometimes explained as bonded validator systems or governing hubs.
In terms of crypto, masternodes are being set up by community members. The reason for doing it often includes the owner's wish to support their chosen coin's network in this way. However, there is another big reason, which is a financial incentive. This is an important detail, as setting up masternodes requires resources, usually a significant amount of them.
Owners need to have quite a bit of technical knowledge as well, as the process can be complex. Apart from the knowledge itself, there is also a certain criteria that they must meet. By far, the most common characteristic of most masternode setups is the need to lock away big amounts of the network's native cryptocurrency. This is necessary due to the way masternodes normally function. They usually work as PoS consensus mechanism. However, while locking up tokens is a necessity in order to create a masternode, this is an independent mechanism of the one used by the network itself.
In other words, the network may use a completely different consensus mechanism, such as PoW, or others, while the masternode still has to submit tokens as stake.
As for other potential resources, there is storage space, a server that will service the node, a dedicated IP address, and more, depending on the type of cryptocurrency.
Masternode originated in the network of Dash, which was called Darkcoin back then. This type of nodes was started in order to support a specific update that made instant transactions possible but also to facilitate a Privatesend feature, which made this privacy coin popular later down the line. The node was designed with an incentive model in order to attract willing participants from the members of the Dash community.
Those who were willing to run a masternode would have a more significant role on the network, a privilege that they use via the voting system where only they and others who run masternodes can participate. The masternode feature became a big success, and other projects started to use them as well. They are also highly customizable, so every network can set them up in accordance with its own needs and wishes.
The incentive also varies from one network to another, but most of them include two things — voting right and a financial reward. At the time of writing, there are more than 500 crypto projects that have masternodes as part of their network.
Benefits and Disadvantages
Becoming a masternode owner is a complex venture, and everyone interested in becoming one should make sure that they understand all the advantages and disadvantages that it includes. Only then can they evaluate them and realize if the terms are acceptable.
As stated earlier, there is a need to own a considerable amount of tokens that are to be locked away as a stake in order to gain such influence on the network. As you might have guessed, the purpose of this requirement is to confirm that there is no ill intent from the owner. Considering the amount of damage that a masternode owner can make to the coin and its value, a large amount must be provided as a stake. If a masternode owner is ever believed to be acting in a malicious manner, their stake can be either slashed or seized entirely.
That way, the stake serves as an advantage and a disadvantage, as it keeps the network secure from its own supporters, but it doesn't allow owners to use these coins for anything else. Also, as soon as the locked coins are transported from the wallet connected to the masternode, the masternode reverted to being a regular node. On the other hand, the more you run a masternode, more rewards you get. A lot of networks rewards masternode owners with block rewards, which helps them cover the costs.
This is a very popular design, and it is one of the main reasons why the trend keeps on growing. New tokens can be accessed with relative ease, and it reminds many to early days of crypto, when everything was much simpler, and acquiring Bitcoin was as easy as running a Bitcoin client.
As for rewards, there is another benefit to running a masternode, which is hidden in the fact that coins used as a stake cannot be spent. Since they must be kept locked away, this is basically HODLing, which is a well-known long-term investment strategy. Basically, it all comes down to obtaining coins and not spending them for a long time until their price gets much higher. When you run a masternode, you are basically doing HODLing with an additional benefit of getting block rewards as well.
The Dash community even compared running a masternode with having a savings account where the minimum deposit is 1,000 DASH coins. While traditional savings accounts would pay interest, running a masternode pays block rewards for performing services on the network. Also, the initial deposit never actually leaves your possession, which is a big benefit, and also the biggest difference between running a masternode and having a savings account.
Another advantage that was also mentioned earlier, and it is the ability to participate in projects and make decisions that will influence the future of the network.
Finally, the last big advantage is the fact that masternode owners end up becoming very knowledgeable regarding blockchain and its networks due to sheer expertise that the process demands.
Why are Masternodes Important for the Network?
Masternodes are an essential part of the crypto space because they provide networks with other options apart from relying on miners and mining pools. Mining pools proved to be a liability, as gaining control of 51% of the network can lead to 51% attacks that are strong enough to ruin a project that they hit.
Because of this, masternodes often receive benefits such as oversight authority, which allows them to accept and deny transactions that the miners have validated. In other words, even if there is a conflict among the miners, the network can still be protected thanks to masternodes.
Another interesting detail regarding masternodes is that they run on a layer located on top of the original blockchain. This is a second layer that developers use for introducing additional features, and this can be a very important part of the blockchain, as it can help the project grow.
Arguments Against Masternodes
The biggest issue that people tend to have with masternodes is an argument that entry barriers might be a start of centralization of the project. While decentralization is a big part of the cryptocurrency philosophy, it is also quite pragmatic, and even necessary, as it provides higher levels of security. However, since a lot of resources and expert knowledge are required in order to successfully run masternodes, not everyone can do it.
This is why there is a concern that bad actors might take over, at least in theory. This is relatively similar in concept to a group of rogue miners that might try to pull off a 51% attack. However, there is a very small chance that this might happen, as masternode owners risk losing not only block rewards but their stake as well. Furthermore, a single masternode owner will not be able to do much, which means that an entire group of them would have to go rogue for any truly damaging impact, which is very improbable.
Where to run a Masternode?
Obviously, this is a question that only an individual member of the community can answer for themselves. There is no right or wrong answer, and everyone needs to choose a project that seems best to them. It is important to do an excessive amount of research first, before buying the necessary coins that would be used as a stake.
One big thing to consider is that, while there are some projects that may offer a significant ROI percentage, it might be more profitable for a masternode owner to go for a coin with low value. All of this criteria and more should be taken into an account before actually making a choice, as you may end up losing a lot of money if you make a bad call. Just take Dash as an example — running a masternode on the Dash network costs an initial 1,000 DASH coins, which is roughly around $65,000 at the time of writing. This is a considerable investment, and since the coins will be locked away anyway, and unable to be used, it is not a step that should be taken lightly.