Should You Run a Masternode? An Analysis of the Pros and Cons of Staking Coins

If you are an avid participator in social media discourse in the crypto sphere, it is likely you have encountered the #masternodemebro hashtag on Twitter. The hashtag began gaining traction since July and had brought attention to masternodes and the role they play in the cryptocurrency space.

In this guide, you will discover what masternodes are, how they work, and the pros and cons of running one.

#MasternodeMeBro

Started by crypto enthusiast Brian Colwell, the hashtag represents a competition where owners of masternodes vote on the cryptocurrencies with the best masternodes. The competition was held over a few months and was divided into different categories based on the market capitalization of the digital currencies as well as other characteristics. Colwell, also known as Crypto Hobbit, says he started the competition “to develop an idea of cryptocurrency community sentiment regarding top masternode projects.”

A cursory search for #masternodembro on Twitter reveals a significant amount of interest in the competition. For masternode operators, the competition is a way to demonstrate the superiority of the project(s) they support. For digital currency projects, a win is likely to entice more people to participate as masternode operators as well as a test of how much they can rally their community around a common goal.

The popularity of the contest is an insightful look into the burgeoning traction that masternodes are gaining. Interest in the competition was so high that some companies promised rewards to the winners, such as Bastion exchange promising a free listing for the top four projects. While the competition eventually ended in October with crypto project Bulwark coming out on top, interest in masternodes remains consistent. Google searches for the term have been at a consistent level despite the significant decrease in the value of the entire cryptocurrency sector.

What Are Masternodes?

In computer science, a node is defined as any device that participates and maintains a network. There are some different types of nodes such as full nodes, light clients and masternodes. Full nodes can download and access the full network while light clients have reduced capacity and thus can only access and store a portion of the network.

A masternode differs significantly from full nodes and light nodes. These type of nodes can best be characterized as full nodes that perform specialized actions as well as possessing a greater level of responsibility and authority in a network. Other definitions for masternodes include governing hubs, as well as bonded validator systems.

In the cryptocurrency sector, masternodes are typically set up by members of a community. The motivations for setting up a masternode are simple. To begin with, the owner of a masternode may like to support the effective functioning of his chosen digital currency through his server. More often than not, however, masternode owners participate because most crypto networks have a secure financial incentive system for masternode operators.

The incentive system is important because setting up a masternode requires a significant amount of resources. A masternode requires its owner to possess a large amount of technical knowledge as they can be complex to set up and run. In addition to the technical knowledge required, nodes must meet certain criteria before they can function as masternodes on a network.

The most common characteristic of masternode setup is the necessity to lock away a considerable amount of the native cryptocurrency of the network in which the node operates. This requirement is due to the design of masternode functionality.

Masternodes function like the proof-of-stake consensus method. While you must lock away tokens as a stake to create a masternode, it is important to understand that this is independent of the consensus mechanism employed in the specific network. This means that a network may rely on proof-of-work or any other consensus mechanism, but when it comes to running masternode, one must still submit tokens as stake first.

Other resources required to set up a masternode which are common across all cryptocurrency networks include the availability of storage space for the entire network, a dedicated IP address as well as a server to service the node. Additional prerequisite criteria vary from network to network and are typically dependent on the focus of the cryptocurrency project.

Masternodes were first witnessed in the digital currency Dash (DASH). Initially called Darkcoin, the altcoin instituted this particular types of node to support an update which allowed for instant transactions. Additionally, the privacy-focused project needed masternodes to facilitate its Privatesend feature which is what allows for private transactions on its network.

To ensure adequate participation from its community, Dash developers included an incentive model into the masternode design. Those running the masternodes were allowed to play a significant role in the growth and development of the project through a voting system. Only masternode owners were allowed to participate in the governance of the project, opposite to those running simple full nodes.

Following the success of the masternode feature in the Dash ecosystem, blockchain projects began to initiate the feature in their networks. Masternodes are highly customizable and can be used to support any number of features on the network. Moreover, similarly to the varying prerequisite criteria referenced earlier, incentives can also vary from network to network. Most networks will include a financial aspect of their incentive model as well as voting rights.  

There are now over 500 digital currency projects that ask members of their community to create and run masternodes on their networks. Examples of these include PIVX, Zcoin, and SysCoin.

The Pros And Cons of Running a Masternode

If you are considering setting up a masternode, it is important to evaluate and understand the advantages and disadvantages of running one. The foremost of these is the apparent fact that the tokens utilized in the initial setup process will not be accessible for an extended period.

As referenced earlier, masternodes require a substantial amount of tokens to be locked away as a stake. The purpose of this is to ensure those setting up these nodes have good intentions. Giving up a stake provides security in the network because actors are less likely to act maliciously since they know any wrongdoing is expected to result in the loss of value of the token and consequently affect the amount of their capital. Additionally, some networks are designed in such a way that if a masternode holder is found to be acting maliciously, his stake will be slashed or wholly seized.

In this way, the stake required is both an advantage and disadvantage. It is a good thing because it keeps networks secure and disincentivizes any bad actors. However, owners will not be able to use this capital in any other way. It is important to note that once the locked funds are moved from the wallet connected to the masternode, it ceases to have this distinction and reverts to being a normal node.

However, the longer one continuously runs a masternode, with the staked tokens intact, the more financial rewards he is entitled to. Most networks designate masternode operators a portion of the block rewards. In this way, a masternode owner can recoup his costs through the incentive mechanism.

This design is one of the primary reasons why masternode popularity is growing. They provide a relatively easy way to gain access to new tokens. Moreover, they are reminiscent of the early days of the crypto sector when it was comparatively simple to run a bitcoin client and acquire new bitcoin tokens.

In addition to being entitled to block rewards, running a masternode has another potential financial reward. HODLing is a well-used financial strategy in the crypto sector. However, HODLing is a passive action, one just securely stores the tokens and leaves them until the price of the asset has reached a target level to sell. Running a masternode is, therefore, a much more intelligent way to HODL as your digital assets are still securely stored and are earning you “interest” at the same time.

The main distinction is that your tokens are working for you to generate more profits for you. The Dash masternode community puts this succinctly:

“Think of a masternode as a savings account with a minimum deposit of 1,000 DASH. A traditional savings account pays interest, and a masternode pays rewards which are very much like interest. In the case of a masternode, the reward (or interest) comes from performing services for the network. Not from lending. The big difference between a traditional savings account and a masternode is that your initial deposit never leaves your possession.”

This leads to another advantage of masternodes. Running a masternode allows to you actively participate in the project you support. For those who show loyalty to the principles upon which the crypto sector is based on, this idealism can be a significant lynchpin. Moreover, as is referenced by the Dash community, running a masternode allows owners to exercise a certain level of financial sovereignty. This is an enticing pro for many.

The final advantage for masternode owners is that they invariably end up becoming quite knowledgeable about blockchain networks due to the amount of attention and expertise running a masternode requires.

For the entire crypto ecosystem, masternodes are essential because they reduce the overreliance of networks on miners, especially mining pools. If a specific mining pool can gain control of over 51 percent of the total network, the network is in a dangerous position. The mining pool can launch a 51 percent attack on the network and commit double spends. These are likely to spell doom for the value of the corresponding token and ultimately lead to the destruction of the project.

Many networks confer masternodes with oversight authority. The authority allows them to accept or deny the transactions validated by miners. This means that even in the event of collusion between miners a network may still be able to remain secure.

Masternodes run on a layer on top of the original blockchain. This second layer allows developers to introduce new features to the network. This provision can be an essential tool for the growth of the project. For instance, the Dash project was only able to institute its privacy-centric features through the masternode second layer.

The primary argument against masternodes is the fact that the barriers to entry are a prime breeding ground for centralization. For cryptocurrency networks, decentralization is as much idealistic as it is pragmatic and necessary. It provides security. The significant amount of resources, as well as the somewhat extensive knowledge, required means only some parties can participate in this manner. Hence, there are concerns that masternodes can be used maliciously by bad actors.

Similarly to a group of colluding miners, a group of masternode operators is theoretically able to launch a 51 attack on a network. However, one can argue that the reasons that masternode owners are unlikely to take this course of action are even weightier than those which relate to miners. Masternode owners will not only lose the block rewards, but they will also lose a portion of or their entire stake. Moreover, the probability that a large enough group of masternode owners can effectively plan such an attack is small.

Choosing Profitable Masternodes

To find the masternode that is the best fit for you, it is important to conduct adequate research into the prerequisite criteria for each network. The comparison resource website masternodes is a good place to start.

An important thing to consider is that while some projects may offer a substantial ROI percentage, it may not directly translate to great profits for you if the cryptocurrency itself is of little value against the dollar or bitcoin. Therefore, when conducting your research, consider the prerequisite criteria, the estimated ROI as well as the potential and relative stability of the asset.

A good example of such a project is Dash. However, the initial 1000 DASH (USD85,000) required for staking is out of reach for many. Another good choice is PIVX which has a 14 percent ROI and requires only USD 7000 in initial staking capital at current price levels. Ultimately, out of the 500 and more projects which have masternodes, comprehensive research is likely to provide you with a project that best fits you.