The purpose of this article is two-fold. First, it will explain what a masternode is in detail and how it is used to run blockchain networks and create passive income for node operators. Secondly, the article serves as a guide to getting started with running your own masternode.
Our hope is that the content here will assist those interested in running a masternode, as well as those interested in the cryptocurrency projects behind the coins as potential investment vehicles.
This article discusses masternodes, which differ from other types of nodes. When we refer to ‘node operators’ or ‘nodes’, it will be in context to masternodes throughout the article.
What are Masternodes?
A masternode is a computer that hosts the full blockchain ledger of a particular cryptocurrency and performs specific functions to support that blockchain network. By hosting a masternode on your computer, you become a node operator who enjoys the following benefits:
- Passive income – Node operators split block rewards for completing ledger functions such as DirectSend, Instant Transactions, and Private Transactions. In order to do this, they must stake coins and host the server (both detailed below).
- Investment strategy – Masternodes provide an opportunity to hedge the risk of investing in volatile crypto assets. They do this by providing predictable returns to node operators who are thus incentivized to run the network.
- Governance rights – People running nodes for a cryptocurrency often get to vote on decisions pertaining to the network, such as with governance. So while it’s a form of passive income, node operators may also enjoy being a part of the overall success of the network.
The very first masternode was rolled out by Dash. Today, Dash maintains a 58% market dominance over all other masternodes. Still, there are many other staking coin projects, such as PIVX and ENERGI, that have solid ROI’s and hundreds, sometimes thousands of operating nodes.
How masternodes are different from other ways of earning crypto
This type of passive income is different from mining cryptocurrencies in several ways. For one, the energy necessary to operate a node is less than with operating Bitcoin mining rigs. Additionally, node operators need less hardware and naturally, have lower computing costs than bitcoin miners.
Staking crypto on it’s own is different from operating a masternode as well. While you do stake coins when running a masternode, you’re also providing additional services to the network, above and beyond staking your coin and just leaving it there.
Operating a node is also a more passive way of investing than day trading. So those that may not have the time (or the emotional stamina) to take part in day trades may prefer masternodes as a way to grow their crypto holdings.
All in all, masternodes provide a crypto savings account that earns over time, yet is somewhat vulnerable to market volatility. Node operators help ensure the network is running optimally, provide services to the network, and receive payouts for hosting and running functions. While still subject to market dips and rises, node operators enjoy less volatility than crypto day traders because of the long term earning potential and regular payouts.
How do masternodes benefit the network?
The use of masternodes enhances the functionality and security of each blockchain network that utilizes them. The nodes enable advanced transactional privacy, instant transactions, and some are even able to execute smart contracts.
Additionally, masternodes are run by people who have skin in the game. They are helping to make sure the entire system runs properly by running functions and helping to govern the network with voting rights. They are then compensated in coin in various ways for doing so.
What do node operators do?
Not only are node operators actively engaged in the best interests of a crypto network, they also directly benefit from their work in the form of block rewards. In order to run masternodes, operators must ‘stake’ a predetermined amount of coin in a dedicated crypto wallet. This stake is held in that wallet as long as the person is running the masternode. The minimum stake is just that – a minimal requirement to participate. But you can also stake more.
The amount a node operator must stake varies between the hundreds of masternode coins currently in operation. The periodicity of block rewards (how often they occur) also varies amongst all the different cryptocurrencies with masternode programs.
For example, with Dash the requirement is to stake 1000 Dash coins, currently valued at $186 each. So the stake would total $186,000. This amount, called “collateral”, is held by you in a dedicated wallet that syncs to the blockchain.
Other coins may have much lower entry points. For example, Horizon SecureNode gives one option to operate a node by staking 42 coins valued about $10 each. So only a $420 stake is necessary. But having at least $500 to $1000 can get you started. Remember, though, that this type of investment is risky and usually constitutes a very small part of an investor’s complete portfolio.
In addition to staking coins, masternode operators in most cases must have some technical savvy, as the requirements also include setting up and maintaining a dedicated host on a Linux server. However, there’s also an option to run a hosted masternode, which is a much simpler process. We go into this topic in more detail later in the article.
How much can you earn by running a masternode?
What you earn passively as a node operator depends on numerous aspects:
- What coin it is
- The coin’s appreciation (or depreciation) in value over time
- How often payouts occur
- The success of the underlying blockchain project
- How much you have staked
- How the crypto market is performing (bear or bull market?)
In consideration of all the above variances and the volatility of the crypto market, node operators can potentially expect between 5% and 20% of each block reward.
Annual returns on investment (ROIs) are listed for each coin, as seen below. But, of course, market volatility can affect these numbers in real time. In the example below, if you staked 1000 Dash coins for a year, your returns in block rewards would be about $12,100 worth of Dash.
Earnings also depend on how often block rewards take place. Some coins issue them several times a day and others just once daily.
So what does hosting a masternode entail?
(Feel free to skip this section if you are reading this as an investment resource only.)
Each coin project will have its own specific requirements for operating a node on their system and earning passive income. But see below for some of the general requirements that you can expect:
- A dedicated IP so other node operators can locate you.
- A dedicated Virtual Private Server (VPS) and Host such as Vultr or Microsoft Azure. You will find a great breakdown on VPS options for masternodes here: https://webhostingprof.com/best-vps-for-masternode-setup-hosting/
- 24-hour uptime is required by some masternodes.
Once you are set up in your chosen network and have staked your coins, your computer will begin to process functions on the blockchain. When blocks are created, node operators will receive rewards.
Some people may find that maintaining their own VPS is beyond their technical capabilities. In that case, there’s something called “Masternodes as a Service”, or MNaaS.
What is Masternodes as a Service (MNaaS)?
A MNaaS is a service provider for those wanting to run a masternode without having to host and maintain their own virtual private server. An example of an MNaaS is Stakenet, which uses its native token XSN. You are able to set up the XSN local wallet, add a little XSN coin to the cloud to cover transaction fees, and sync to their blockchain in a matter of minutes.
The minimum stake is 15,000 XSN, valued today at $.099 so an initial investment of about $1500. The daily fee to run the masternode is about $.15 and the cloud balance where your transaction fees come out can also earn XSN.
As for block rewards, for each new block 20 XSN coins are minted:
- 45% of them go to regular stakers
- 45% goes to masternodes
- 10% is earmarked for treasury and development
While XSN (Stakenet’s own coin) is currently the only masternode available through their MNaaS, they do plan to provide this service to additional masternode coins. With their cross chain blockchain platform, Stakenet’s goal is to transform masternodes into a viable, decentralized business option.
How can you invest in masternodes without running one?
Obviously, to invest in masternodes, you can run a node and earn that passive income. But if you are not comfortable hosting a server and supporting the functionality of the network, there are still several ways to invest in masternode coins.
After research, invest in the foundational coin itself by buying and hodl’ing. A quick way to do this is to:
- Select the masternode coin you are interested in from an aggregator like https://masternodes.online/.
- Go to CoinRanking.com and search for that coin.
- Scroll down to see what cryptocurrency exchanges list it.
- Sign up at that exchange and purchase the coin.
The 2nd way to take part without operating a node is to invest in a 3rd party masternode fund. These are new, *risky* investment vehicles and you may not have heard of them yet. But we will be seeing more action in these funds as the bull market continues. Instead of investing in a single masternode coin, the fund creates a portfolio of best-performing nodes. Do your due diligence and research the team behind the fund. For example, INDX is one fund and you can research them by reading the INDX white paper.
As always with crypto or any investments, find projects that match your risk tolerance. In the following section, we take a look at different ways for you to assess specific masternode coins.
How can I tell which masternode is right for me?
Let’s quickly review all the parameters found at masternode listing sites like Masternodes.online, as seen in the image below:
- The coin Name
- Price – the current price of the coin on exchanges
- Change – how the price has changed in the last 24 hours (green is up, red is down)
- Volume – how much in dollar amounts was traded in last 24 hours
- Market Cap – the number of coins circulating x the coin price
- ROI – the annual return on investment, or how much earnings are expected over a year
- Nodes – how many nodes are operating on a particular network
- # Required – how many coins must be staked to operate a node
- Minimum worth – what is the minimum investment to operate a node (number of coins x current price)
NOTE: During research for this article, it was noticed that the number of masternodes for certain coins were vastly underreported on the Masternodes.online website. When considering delving into masternodes, you can also check on the coin’s blockchain explorer to be certain of the number of nodes on a particular network. The explorer will always have the most up-to-date information. It’s also a great way to view real-time activity.
Now that you have an understanding of the masternode’s details, let’s look at a few other important things to notice:
What to look for in a masternode
- Liquidity – Check to see how many exchanges the node is offered on. At MasterNodes.online, simply click on the coin and it will bring up an image similar to that below. At bottom left, you’ll see “markets.” These are your choices for exchanges to buy that coin. Also, note which exchanges are there. Are you familiar with them? If you think some of the exchanges are questionable, review their CoinMarketCap adjusted volume and history
- The team and project behind the coin. Read the website and the whitepaper.
- Look at the charted history of the coin on CoinMarketCap. A good place to check for community feedback is the project’s Discord, Twitter or Telegram account.
- Feeds full of unanswered questions, criticisms, and lambo-talk may signal a lack of serious potential.
- When getting started, watch the price – you may be able to choose a later bid order to get a more favourable price. If you suspect a downtrend, it may be worth it to wait before purchasing your stake.
- The number of nodes – this can give you some information as to the longevity of the project. Normally, the longer the project continues, the more nodes it will have. But markets also have a say in this. Sometimes nodes are left inactive by their operators as well.
Red flags
- Coins with low volume – may signify low interest in the project, a new project, or minimal activity.
- Masternodes with no market cap available – usually designated by a “?” – could signal limited liquidity.
- High ROIs but low volumes – this may indicate manipulation.
- Platform admins requesting your private keys – don’t be fooled by this – your private keys are in a local wallet and are for your eyes only.
Conclusion
With the bull market currently in full force and altcoins riding the bitcoin dominance gravy train, we could see a lot more interest in masternodes in 2024 and beyond. Right now there are about 130,000 masternodes in total across 1000's of blockchain networks. In 2025, we could see those numbers grow, and possibly double.
In 2018, masternodes had somewhat of a bad reputation for being associated with scam projects. That reputation is slowly ebbing as the more developed coins emerge and crypto investors become more knowledgeable. Not only that, many of these masternodes have been running for well over many years now, giving some credence to the projects that survived the crypto winters.
In the future, we may also see masternodes play a role in the crypto commodities market, which is an exciting new investment arena. We hope this article was helping in explaining all about masternodes and the ways to potentially profit from them.
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