So you’re into blockchain, cryptocurrency, and the decentralised future of the web?

Sure, you’ve heard of masternodes, but what exactly are they? Why are they important? And how do you run one? Here's everything you need to know about masternodes.

Nodes

To understand what a masternode is, it helps to know about nodes.
In a computing context, a node is a computer or device that stores data.

Networks

Nodes can be linked to other nodes, enabling data to be shared between them. This creates a network.

Full nodes

In a blockchain, a network of nodes hold a record of all the transactions made in a particular cryptocurrency. This record is called the ledger. Nodes which store and validate the ledger are referred to as full nodes.
Full nodes come to a consensus about the state of the blockchain by comparing transaction records and making sure they’re all the same. If they’re not, the odd node out is ignored and discarded from the network. This is important because it stops rule-bending and malicious activity like fake transactions.

Masternodes

A masternode is a full node which stakes a certain amount of cryptocurrency, and is rewarded for doing so. Staking helps the network by reducing selling pressure, so masternodes are incentivised with cryptocurrency rewards. The resulting reduction in circulating token supply can also help to increase the value of a given cryptocurrency. Higher-value rewards help masternode operators offset the costs of operation, while also inspiring the creation of more masternodes. These financial incentives also help to ensure masternodes behave honestly.

Service nodes

Some blockchain projects use masternodes to provide additional services to their networks. These services can include things like private transactions, instant messaging, and decentralised marketplaces. We call these advanced masternodes 'service nodes'.

WHY RUN A MASTERNODE?

There are several reasons you might want to run a masternode.

Financial

Masternodes receive rewards in the form of cryptocurrency. This is similar to earning interest from a bank savings account. Banks reward you with interest, based on how much you save. Blockchain projects reward you with cryptocurrency, based on how much your masternode stakes. And just like earning interest, masternodes generally require very little work once set up.

Altruistic

If you believe in a blockchain project — what it’s doing, why, and how it’s doing it — running a masternode can help to protect the project’s network from things like Sybil attacks.

Like giving blood, or donating to charity, you might not run a masternode to receive anything in return. Running a masternode makes a positive contribution to the community of your chosen project.

Community

Running a masternode is a great way to be a part of a blockchain project community. Through supporting an important and integral aspect of the project, running a masternode connects you with other like-minded people, providing a sense of shared purpose and belonging.

There are loads of different blockchain projects out there. Which community is right for you depends on what suits you best.

Environmental

Masternodes generally require significant energy resources to run. However, they are still considerably more efficient than cryptocurrency mining technology. This means less impact on the environment, and lower electricity costs than cryptocurrency mining — masternodes are a win for blockchain projects and the environment.

For an in-depth look at the difference between masternodes and mining, as well as Proof of Work (PoW) and Proof of Service (PoS) consensus mechanisms, click here.

CHOOSING A MASTERNODE

There are many factors to consider when choosing which masternode to run.

Vision

Blockchain projects are all different, each with their own particular goal and specific problem they’re trying to solve. Maybe the project is open-source, privacy focused, security focused, a not-for-profit charity, or has some other unique attribute.

Does the vision of a particular project align with your own values? Do you believe others will get behind that vision as well? If so, running a masternode for that project might be worth considering.

Rewards

Running a masternode is a long-term project. Masternodes can require significant setup costs and be expensive to keep in operation. However, the rewards you earn can definitely make running them worth it.

Do your research: What’s the market value of the cryptocurrency you could earn? What are its trends? What’s the inflation rate? If the overall rewards look to be greater than your costs, it may be worth your while to run a masternode.

Read more about masternode rewards here.

Profile

A blockchain project’s public profile can have a major impact on the value of their cryptocurrency, and in turn, the worth of the rewards you could earn for running their masternode.

What’s their reputation? How many followers do they have on social media? Generally, the bigger the project’s profile, the more users it has, leading to a thriving ecosystem. But be careful: when it comes to public profiles, bigger isn’t always better.

Team

The team behind any blockchain project is the key to its success. The expertise, drive, and reliability of their people can make all the difference. Take a look at the developers’ recent progress on Github, and read about their future goals.

Check out their marketing. Read up on their leader. Is the team diverse, experienced, passionate? Will they deliver on their promises? Your experience running a masternode can be greatly affected by a team’s ability and output, so choose wisely. For more on what to look for in a blockchain project team, go here.

Support

Running a masternode can require technical know-how and troubleshooting, so having a community that provides support can be very helpful. Support can come from the blockchain project’s team, as well as its users.

Does the project have designated community managers offering support? Is the community quick to respond when someone needs help? Does the project have detailed guides and documentation? The level of support given for running a masternode can make the process much smoother.

To learn more about how to choose a blockchain project, go here.

SETTING UP A MASTERNODE

While the specific requirements for running a masternode vary, here are some common basics.

Server

A server is required to host the masternode and run its software. You can purchase your own, but using a Virtual Private Server (VPS) is much more cost-efficient.

Using a VPS means you don’t have to worry about the logistics (or cost) of powering a server yourself. Instead, you’ll pay a small but regular fee to the VPS provider.

Software

You’ll need specific software to run your masternode of choice, which you should be able to download (and read detailed instructions for) on the associated blockchain project’s website. You’ll also need to download wallet software to store the cryptocurrency you’ll be staking.


Typically, you’ll also need a good understanding of how to use the command line (including running a Secure Shell, or SHH) to log into your server.

Cryptocurrency

To run a masternode, you must stake (lock up) a certain amount of cryptocurrency for a period of time. Exactly how long, how much, and of which cryptocurrency, depends on the blockchain project you’ve decided to run a masternode for. Some are static (fixed amounts and durations), and some are dynamic (the amount and duration shift according to various factors).

Staking proves that you have collateral in the ecosystem: skin in the game. Having skin in the game — something to lose — discourages malicious activity. The staking requirement exists to prevent users from buying up a majority share in the network. If someone were able to do this, it would give them an unfair advantage in terms of receiving rewards and a dangerous level of control in terms of power over the network. Having to stake an amount of crypto before you can start a node helps to prevent any one person from having too much control.

Pooling

If you don’t have enough cryptocurrency to meet a masternode’s staking requirement, it’s worth considering pooling. Pooling involves combining your cryptocurrency with that of one or more others, to reach the total staking requirement. The cost of running a server can be shared proportionate to each person’s contribution to the staking requirement — and so can the rewards (minus a masternode operator fee).

Some blockchain projects offer masternode pooling as a trustless part of their software, meaning that instead of placing trust in an individual (who you may never have met in person), you place your trust in the network. If your chosen masternode doesn’t have this option, there are third party companies that offer pooling services for staking.

MASTERNODE REWARDS

Let’s face it, we all like receiving rewards. It’s one of the major perks of running a masternode.

Earning Rewards

In most blockchains, rewards are automated by the network using a queue system. When you start running a masternode you’ll join the back of the queue to receive rewards. When the masternode at the front of the queue receives its reward, it goes to the back, and you’ll move forward. Eventually, your masternode will be first in line and you’ll receive your reward. Your masternode then heads to the back of the queue, and the process starts all over again.

Frequency

When you reach the front of the queue, you’ll receive your reward immediately in your cryptocurrency’s wallet software. How often you reach the front of the queue depends on how long the queue is, and the block time of your chosen project.

Reward Size

The size of a masternode reward varies between blockchain projects. Some are small, some are large, and some may vary over time based on emission curves or other economic frameworks. Check out the monetary policy of your chosen masternode to find out what rewards you could receive.

Payment

Masternode rewards come in the form of a certain amount of the cryptocurrency your masternode is validating. If you want to change this into non-virtual money, you can use an online exchange, or make a direct peer-to-peer arrangement.

Calculating Rewards

To calculate your potential masternode rewards, divide your net profit by the amount of your stake.

For example: If you receive a masternode reward of 50 coins, and your masternode stake is 5000 coins, your reward percentage is 1% (50 ÷ 5000 = 0.01 or 1%).

Of course, there are also other costs (i.e. server, electricity, internet) which you should also take into account. If you find that the sum of your weekly rewards are greater than the sum of your weekly costs, you’re in the black.

Learn how to work out your rewards in more detail here.

Masternodes vs Mining

Mining is an alternative way to earn rewards from blockchain projects. The size of the initial capital contribution required to mine is generally much higher than to run a masternode. It involves a major upfront cost — hardware. This hardware will depreciate over time, making it difficult for mining rewards to outweigh the costs.

Masternodes also require an initial capital contribution, but that contribution (the staking requirement) is locked away, as opposed to being spent — and it will be available to you again in a short amount of time. You can quickly get back what you initially put in, along with your rewards. Plus, since the initial cost takes the form of the cryptocurrency itself, if the crypto goes up in value, so does your stake.

THE RISKS

You’re nearly there! Before you start running that masternode, it’s important to be aware of the risks involved.

Volatility

The market for cryptocurrency can be extremely volatile, with values changing greatly in short amounts of time.

By staking a significant amount of cryptocurrency, you risk the market fluctuating, and not being able to do anything about it for a certain period of time while your coins are locked up, which may result in a loss.

Scams

Some companies that offer to set up masternodes on your behalf are not necessarily trustworthy, and may steal your funds.

As with any third-party service, there are are inherent risks involved when entrusting your funds to another person or company. Do you research, find reviews, and don’t give up your funds until you’re absolutely sure you’re giving them to a legitimate service.

Software Updates

If you don’t keep your masternode’s software up-to-date, you run the risk of missing a hard-fork (major change in code), which would render your cryptocurrency useless — at least until you update. You also won’t be able to earn rewards if your masternode misses a hard fork, because your node isn’t on the right blockchain.

Company Dramas

The actions of the cryptocurrency project behind your masternode can have a major impact on the value of your contribution, which you have little control over. If development stops, or the project stops entirely, the value of the cryptocurrency you are staking may drop.

There are many great reasons to run a masternode —
and many things to consider before you get going.

Masternodes and service nodes are the building blocks of the next generation of blockchain technologies. They secure the blockchain, and — in the case of service nodes — enable new online services that will provide unprecedented privacy, security and reliability.

If you’re interested in running your own masternode or service node, it’s as simple as choosing a project, spinning up a VPS and staking some cryptocurrency. Just like that, you’ll be a part of the future of blockchain — and you’ll be rewarded for your part in it, too!

Intro
Nodes
Networks
Full nodes
Masternodes
Why run a masternode?
Choosing a masternode to run
Setting up a masternode
Rewards
Risks
Conclusion