The concept of a masternode started gaining popularity thanks to the Dash cryptocurrency. It is quite interesting to see masternodes form such an integral backbone of the network. Operators receive monetary rewards for running this node, yet they also need to provide a financial stake of their own. It is due time we take a closer look at what masternodes entail exactly and why this concept has become so popular.
Explaining The Idea of a Masternode
It is important to understand how the Dash ecosystem works before one can see the value of a masternode. Dash, a popular privacy-centric altcoin, uses a proof-of-work system similar to the one found in bitcoin. However, that is only part of the ecosystem that allows users to earn money. Not everyone is able to contribute to the network as a miner, which is why masternodes were introduced.
Look at a masternode as a special server that is maintained at all times. Masternodes are trustless and decentralized, similar to how bitcoin nodes operate. There is a major difference, though, as Dash masternodes take care of the anonymization part of the Darksend protocol. users can opt to send transactions anonymously by using this feature directly from their Dash wallet.
Every masternode on the network provides this anonymization service, ensuring there is no centralized party to attack or take down. Moreover, masternodes ensure all transactions are validated in near real-time, making them quite efficient. Unlike bitcoin nodes, however, owners of a Dash masternode will receive a financial compensation for providing these invaluable services.
Individual masternodes on the network have a chance to be selected as a recipient of part of each mined block’s value. As more time progresses, masternodes will earn the same share per block reward – 45% – yet it will take longer for investors to see a return on investment. For example, with 1,000 masternodes in January 2016, the select masternode would earn 47.3% ROI per year. Increasing the number of nodes fourfold means every node sees 11.8% ROI. It is expected this number will drop to between 4.5% and 18.1% annually by 2029, depending on how many nodes are part of the ecosystem at that time.
To achieve this ROI, masternode owners must place 1,000 DASH into the wallet associated with this node. Moving the funds out of the wallet will remove the masternode from the network. Additionally, the wallet address will no longer be eligible for rewards either. It is possible for users to move their funds out of the wallet at any given time, although it is not in anyone’s best interest to do so overnight. With the rewards flowing in virtually every week, there is a lot of passive income to be generated by running a masternode.
All things considered, using a masternode is an intriguing system. It was a great way to attract investors early on, as Dash was priced much lower per coin a few years ago. Putting up 1,000 DASH as collateral then and running the masternode till today would have earned the user a substantial profit. Moreover, given Dash’s value appreciation, the passively generated interest almost quintupled in value as well. It is doubtful bitcoin will ever introduce masternodes into its ecosystem, albeit it would be quite interesting to see for sure.
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