What are crypto masternodes?
What is a node?
A node is one of the key terms you need to understand in the crypto space as it refers to a computer that participates in a blockchain network by conducting certain tasks related to verifying transactions and storing information as well as maintaining network stability of cryptocurrency networks.
Don’t confuse nodes with stakers or miners- they form a symbiotic relationship with nodes since they depend on them to verify blockchain history and access data before they can start staking or mining.
Nodes can be illustrated as stakeholders of the blockchain network with their devices being authorised to keep track of the network and assume the role of a communication hub. They can serve as a communication or redistribution point that can conduct divergent tasks on a decentralised blockchain network.
However, a node’s primary task is to confirm the legality of each batch of network transactions called blocks. A unique identifier is given to each node to distinguish one node from another. Long story short, regular nodes assume the role of a blockchain’s guardian, validate transactions based on majority consensus and serve as friendly guides that help users interact with the blockchain.
To learn more about nodes and their main purposes, why not read this article: ‘How to run a node’.
Types of nodes
Generally, nodes can be categorised as lightweight nodes or full nodes. While full nodes are used to strengthen the blockchain network by downloading the entire chain’s history which enables them to enforce rules and monitor activity, lightweight nodes are responsible for a lighter workload as they rely on full nodes to work properly.
In other words, light nodes and full nodes differ in the amount of blockchain data they can store- they both require less technical resources than masternodes, such as computational power, Internet bandwidth and energy consumption.
Regular nodes can be further divided into two additional sub-types: miner nodes and listening nodes, also known as supernodes.
Considering that miners participate in the broader blockchain ecosystem, they also function as nodes- thereby, miner nodes can be solo nodes with the miner running the node on their device or they can participate in mining pools. On the other hand, listening nodes refer to public full nodes that communicate with other nodes, verify transactions and enhance network security.
Finally, there are masternodes as high-powered nodes that encompass more capabilities than regular light or full nodes within blockchain networks by providing advanced features and governance traits. Let's dive into the concept of masternodes.
Understanding masternodes
As the name suggests, a masternode goes beyond the capability of a regular node. Masternodes came to the scene with the Dash protocol in 2014 and a system known as Proof-of-Service (PoSe). These nodes do not create new blocks, but they verify them instead, along with governance, regulatory and special management roles assigned to them.
Masternode’s main purpose is to perform specific functions that support blockchain networks and enable them to run smoothly. These functions include increasing the privacy of transactions, directly sending funds, participating in governance and voting, enabling a budgeting and treasury system, and facilitating instant transactions.
Masternode owners must obtain a certain amount of cryptocurrency to act as collateral. The collateral-based system means that the collateral equals a security deposit that ensures the masternode owner is invested in the network's success, and prevents malicious actors from taking over the blockchain network. Therefore, masternodes contribute to the decentralisation of the blockchain network and prevent any single entity from having excessive control over it.
The collateral-based system in which masternodes operate is akin to a Proof-of-Stake (PoS) protocol. This approach makes sure that the blockchain network’s most significant nodes are constantly motivated in a financial sense.
What is the difference between masternodes and full nodes?
To understand the main functions of masternodes, we need to get back to full nodes for a bit. A full node is a node that holds a copy of the entire distributed ledger. It assumes an important role in the functioning of the whole network as it is required to submit new blocks for verification by other nodes.
In case a major catastrophe happens, and the entire network of nodes goes down, a blockchain network could be restored as long as at least one device has a complete copy of the ledger. That is the main perk of full nodes- maintaining the security of the entire network.
That brings us to the key difference between full nodes and masternodes- in contrast to full nodes, masternodes don’t submit blocks for validation, but they validate those blocks submitted by other nodes.
Masternodes do all the tasks dedicated to full nodes and more. As mentioned above, masternodes are assigned special management, governance, regulatory, and additional budget-related tasks.
Another difference lies in the aspect of rewards- due to the advanced features and scarcity of these nodes, masternode owners often receive direct rewards for their services as they require additional expertise and resources.
On the other hand, light and full nodes rarely receive direct rewards and can be run by anyone with a device and Internet connection. However, full nodes may require more processing power, Internet bandwidth, and storage space than their light counterparts.
What is the role of masternodes within the blockchain network?
The bottom line is that light, full and masternodes are computers responsible for transaction verification and storing blockchain data. Building upon the capabilities of regular nodes such as light and full nodes, masternodes are more specialised as they perform additional tasks and support governance decisions.
Therefore, these specialised nodes play a crucial role in maintaining a higher degree of security and integrity of the blockchain. Masternodes facilitate instant transactions that can be completed in seconds and provide privacy by anonymising transactions and preventing malicious actors from accessing transaction data.
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Which blockchain network has masternodes?
As mentioned above, the masternode concept was first introduced by the Dash blockchain back in 2014. Since then, several blockchains have adopted masternodes such as Syscoin (SYS), Zcoin (XZC), Decred (DCR), PIVX (PIVX), Horizen (ZEN), and Energi (NRG). Therefore, not all blockchains have masternodes even if they have light and full nodes set in place.
How do masternodes work?
Let’s use Bitcoin and Dash as examples. Bitcoin is based on a network of nodes that store blockchain's entire history data, but the miners verify transactions, add new blocks, and collect fees. Unless one engages in mining, operating a Bitcoin node doesn’t produce any income.
Dash utilises a two-tier network that encompasses both masternodes and miners. The collateral-based system requires a masternode owner to lock up 1,000 coins as collateral. Masternodes engage in validating transactions, storing data and providing additional features such as direct and private transactions. Operators of these nodes get rewards for their contribution.
This example stipulates that masternodes have more authority than a regular node and additional features such as voting events and executing protocol operations. Since the system resembles staking in a PoS consensus mechanism, masternodes are also known as bonded validator systems.
Masternodes run on dedicated servers, either virtual or physical that must stay online all the time. This means that a masternode requires a physical or virtual private server operating continuously
How to set up and run a masternode?
To operate a masternode, a user has to lock up collateral. For example, if you want to run a Dash masternode, you have to own and lock up 1,000 Dash coins.
Secondly, masternode operators must configure the masternode software to connect to the network and perform all necessary functions such as transaction validation and data storage. One needs to maintain a stable Internet connection and ensure that the software is up-to-date. Even though masternodes are not as demanding as mining operations, they still require a bit more specialised hardware and technical knowledge.
Finally, operators need to have a dedicated IP address and server for the node, along with required storage capacity. Keep in mind that these qualifying requirements typically vary among divergent networks, but the underlying principles remain.
Pros and cons of masternodes
Users set up and run masternodes for financial purposes. The longer the collateral has been locked up, the more rewards owners receive. Additionally, many cryptocurrency networks provide operators with a portion of block rewards as well. Some investors see masternode operations as a way of hodling, and some compare them to savings accounts.
Apart from the financial advantage, operators of masternodes are empowered to approve or deny transactions verified by other nodes which provides them with additional authority.
As for disadvantages, a part of the crypto community is concerned that the requirements for running a masternode could lead eventually to centralisation and go against the ethos of blockchain networks. Since running a masternode requires certain financial and technical resources as well as expertise, it is not accessible by anyone.
Critics often state that this leads to an uneven playing field within the crypto space. On the other hand, it has been stated that there is no benefit for masternode operators to act maliciously when compared to miners since they would lose their rewards and a certain amount of their collateral.
The second disadvantage is related to the collateral- since running a masternode requires users to lock up their funds, they cannot use them to trade. For example, this could be a problem for traders who want to take advantage of market swings.