What is a Masternode and why should I have one?

Many of you involved in the Cryptosphere or considering investing may have heard of the term Masternode and be wondering what a Masternode is?

In these articles I hope to open your eyes to the world of Masternodes, explain what they are, how they work and how to avoid the bad ones. None of these articles should be considered as investment advice however and you should always DYOR (do your own research).

What is a Masternode?

Before I explain what a Masternode is its worth spending a little time running through the different types of blockchain out there and which ones support running a Masternode.

Blockchains, in broad terms, break down into three types. POW (proof of work), POS (proof of stake) and a mixture of both.

Each of these blockchains must have a mechanism for processing transactions which allows the blockchain to function.

POW blockchains, such as Bitcoin, are underpinned by ‘miners’ who process transactions by ‘mining’ blocks which are then added to the blockchain. Without going into the technical detail in too much depth the mining of a block is achieved by the miners ‘rig’ (which is a computer specifically designed to process data at a very high rate) guessing the answer to a puzzle. The first mining rig to guess the answer to this puzzle correctly wins the right to mine the block. Once a block is mined the miner is also rewarded with, in this case, Bitcoin. Unfortunately POW systems are very energy intensive and the crypto industry is slowly moving over to an alternative, more energy efficient, type of blockchain called POS.

POS blockchains are underpinned by Masternodes. These are computers which process transactions on the blockchain and as a result are rewarded with coins from the blocks being created. Nodes sit on the blockchain, normally within a queuing system, and when they reach a certain position in this queue can be selected, at random, to be rewarded for participating within the network. As a result of this rewards can appear at different intervals but usually average out over time.

Why should I run a Masternode?

Masternodes provide the opportunity to invest in Cryptocurrencies with the added benefit of earning guaranteed extra coins in addition to gaining exposure to the large potential increases in value that can come within the Cryptosphere and owning cryptocurrencies.

These coins are awarded through running a node and as covered later in this article these rewards can also be used to generate rewards on top of your rewards. Great eh?

So, what can go wrong?

Well, as with any investment there are risks and these can be significant within the Masternode world. Since the beginning of 2018 there has been an explosion in the number of Masternode coins and unfortunately this has also attracted a fair number of scammers to this space.

Therefore this article comes with a word of warning. Be very cautious of any Masternode coin offering very high ROI percentages — anything in the 1,000% or above bracket really needs to be treated with caution and any coin that does not have a utility as well should be avoided in the early stages of it’s life. I will go into more detail of the steps I take to minimise the risk of choosing a scam coin and what to look out for in my next article.

OK, I want to run a Masternode. What’s next?

So now we know at a basic level what a Masternode is I’ll now explain in more detail how you set-up a Masternode and how to maximise your returns from it.

As explained previously a Masternode is a computer which processes transactions on a blockchain and, as a result, is rewarded with extra coins for doing so.

As you can probably appreciate the developers of any given blockchain want those running nodes to do so in a responsible fashion. They also want to ensure node owners do not try to disrupt the blockchain for personal gain.

This is achieved by requiring a node owner to hold a certain amount of coins to ensure they have a vested interest in the blockchain and thereby ensure they run their node in a responsible fashion.

For this example we’ll assume the required collateral is 10,000 coins and we’ll discuss running your node in what is called a cold wallet setup — this is the most common setup used and the one I use for all my nodes.

In very basic steps this is how you set-up your node (you will find more detailed guides for each node usually on the specific coins website or discord group):

1 — Buy 10,010 coins on an exchange (always buy slightly more to cover transaction fees both from the exchange and in your wallet).

2 — Install the desktop wallet on your home PC and synchronise to the blockchain — some blockchains allow you to download this data separately to speed up the synchronisation step.

3 — Send your coins to your wallet.

4 — Setup a node address in your wallet and send your coins to the node address. This will then allow you to gather the private key and transaction information needed to set-up your node.

5 — Set-up the node. You will have a choice whether you do this on a personal server at your home/office or on a VPS (virtual private server) at a provider’s datacentre. The two most commonly used providers are Vultr (who I use — here is my referral link. Feel free to use this if you sign-up. https://www.vultr.com/?ref=7392513) and Digital Ocean.

6 — Once the server has been built and you have installed and configured the nodes wallet you are ready to start the server. You will need to start the node ‘daemon’ at the server. The server will then synchronise with the blockchain at this point.

7 — Set-up the Masternode within your desktop wallet and start it up.

8 — At this point the node will be running and you will start to receive rewards.

NB — for step 2 you may also wish to consider installing your wallet on a separate VPS (a simple windows one would probably be best as this tends to be the widest supported O/S for desktop wallets). From a security standpoint this may be preferable as this VPS will not have been used for internet browsing or have other programs installed thereby reducing any risk of having key loggers or other spyware installed.

For most nodes you can safely shutdown the computer hosting your desktop wallet without impacting the node BUT if you want to ‘stake’ your rewards you will need to keep the desktop wallet open and running 24/7. If you wish to stake rewards, using a separate window VPS for the wallet may be preferable. These are the rewards on top of your rewards.

So, how do I earn these rewards on top of my rewards?

Staking rewards, if allowed for the specific blockchain, should definitely be considered if you are not selling your node rewards. Whether you are holding them to build enough for a new node or whether you are just holding hoping for the market price to increase staking can be used to ensure these coins continue to work for you. Normally all you need to do is ensure your wallet is configured to allow staking (normally achieved via the wallet settings or configuration file change) and then leave the host computer switched on, connected to the internet and the wallet left open. Once your coins have matured (varies but around 11 hours is common) they will be staked in the network and you will then be eligible to earn rewards.

When staking it is always worth ensuring your staked coins are not ‘staked’ as a single group. Once a group of staked coins earns a reward those coins then become immature and ineligible for staking until matured. Grouping coins into staking groups is a judgement call but on average I try to collate coins into groups of 1,000 to ensure enough ‘network weight’ — basically your chance of getting a reward allocated. Splitting into groups also gives you more chances of being selected as well — think of it as buying more than one ticket to the lottery. Multiple groups equals more tickets and bigger groups of coins increases the chance of winning with that group. Grouping coins can be done via the coin control function in your wallet and you just send yourself these coins 1,000 at a time — just make sure you don’t send any of your node collateral as this would stop your node working!

I hope the above has opened your eyes a little into the world of Masternodes.

In my next article I will run through the steps I take when assessing whether to ‘invest’ in a node or not and what strategies the scammers use to suck in you.

Happy noding!

For updates for when my next article lands or just general Masternodes updates, advice and guidance follow me on Twitter at https://twitter.com/Ade_Redman

PS – please feel free to read my next article in this series. I want to run a Masternode. How do I pick one?