How do masternodes work?

There’s a common misconception in the cryptocurrency world that the only real way to make money is to invest in coins and hope they increase in value. But …

Masternodes

Masternodes

There’s a common misconception in the cryptocurrency world that the only real way to make money is to invest in coins and hope they increase in value. But that’s not really the case, because you can get yourself a virtual “job” on the blockchain, a decentralised network that facilitates all things crypto.

One of those “jobs” is to set up and run a masternode. That’s all well and good, I hear you cry, but what on earth is a masternode? Well, read on for an explanation in simple language, or visit a specialist knowledge centre like masternodes.com

Masternodes explained in simple terms

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Everyone who has a virtual wallet in which they keep their cryptocurrency does so on their own node on the blockchain. A masternode can be thought of as a “super node”, a touchpoint that keeps a full copy of the blockchain network in real time. It’s one of many such masternodes on any particular blockchain network.

Masternodes serve an important function for the smooth running of the network, with special functions including (these functions can differ between various types of cryptocurrency):

  • Increasing the privacy of transactions
  • Undertaking instant transactions
  • Voting rights and taking part in governance decisions
  • Maintaining network security

All the masternodes are connected to each other, and it is this that makes the blockchain decentralised. In other words, the integrity of the network is never at risk from one single point of failure.

Those owning and maintaining the masternodes get rewarded for doing so because their service maintains the function of the cryptocurrency.

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Great, how do I get a masternode?

The good news is that anyone can have one. The bad news is that it costs a lot of money to do so. And by money, we mean cryptocurrency of the network. The network must maintain its integrity, so forcing masternode operators to invest heavily in the currency means they have a big stake in its stability and growth.

Here’s what you’ll need to continue:

  • A specified number of coins for the cryptocurrency. That might be 1000 DASH coins, or 10,000 coins for PIVX. At the time of writing, DASH is valued at $69.75, so the entry point is $66,750!
  • A stable VPS server on which you host the masternode wallet, and this must be online 24/7
  • A dedicated IP address
  • Sufficient storage space for the entire blockchain

So, there’s quite a hefty financial and logistical investment you have to make. There have to be benefits, right? Oh yes, read on.

Making money with masternodes

By running a masternode you’re a pillar of support that ensures the particular blockchain runs smoothly, transactions go through in double-quick time, and everyone is, therefore, happy. But you’re not going to put in that expense and time for nothing.

So you effectively get paid.

Cryptocurrencies have different ways of rewarding their masternode operators. And the best bit is, once you’ve done the initial legwork, you can sit back and do very little. It’s a cool passive income or money you can make while you sleep. You should undertake in-depth research to understand better which reward system and cryptocurrency will suit you best.

If you already think you’re out of the running because of the high investment cost, there are people pooling resources to invest in a masternode. It’s something to consider.

How are rewards met? Holders of masternodes get a slice of reward each time a transaction is made. Individually, these are minuscule, but the figure becomes meaningful the more transactions or normal nodes and blocks are created on the blockchain. That’s the passive income element.

You might be paid multiple times a day, or once a day.

But the real potential is in the value of the cryptocurrency itself. Those 1000 DASH coins you invested in order to get your masternode in place, for example. If in a few years the value of DASH returned to its epic level of $1,541, your 1000 coins would have risen in value from $66,750 to a mouthwatering $1.5 million!

DASH price chartThe price of DASH coin over the past 90 days

Of course, there is no guarantee the value of your cryptocurrency will rise by that much, if at all. But the general consensus is the stable currencies will rise over time from their current rate.

Can you stop being a masternode at any time?

Yes, you can. While your masternode is active, your coin investment in it is ‘locked’, meaning you can’t access them for any other purpose, like making purchases or simply selling them.

If you want to stop hosting your masternode, you can do so, and have access to your invested coins once again. You’ll be hoping the value has risen since you invested them, and you can cash out for a healthy profit.

Is it worth the time, effort and risk?

Like all investments, it’s rather down to your individual financial circumstances. If you can afford the initial coin investment required to set up a masternode, and have the technical skill to do so (there are many intuitive guides available), and you’re confident your chosen cryptocurrency is stable, then it could be a great opportunity for you.

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