Masternodes are something that many in the cryptocurrency world may come across, but for many they remain the preserve of blockchain geeks. However, masternodes represent an easy way to earn passive income, and can prove particularly fruitful when a bull market rolls around. In this article we’ll touch on masternodes, what they can do for you, and how easy they are to operate.
What is a Masternode?
Blockchain technology is built on the premise that a collection of ‘nodes’ (computers) from all over the world act as the points of verification for transactions. This ensures that no single entity operates the system, increasing trust in the system and reducing the possibility of attack. Every truly decentralized blockchain therefore needs computers all over the world to be running its blockchain software in the background, processing the various transactions on it. But, running computers costs money, which is why those operating masternodes are rewarded, usually in the proprietary coin of the blockchain (for example Dash). Making for a simple explanation, a masternode is simply a computer running a blockchain’s software and verifying transactions on that blockchain, spitting out coins as a reward.
How Do I Get a Masternode?
Obtaining a masternode starts with buying a set number of coins associated with that project and keeping them in a wallet as ‘collateral’. This number is usually quite high, as blockchain projects want to make sure that masternode operators are suitably supportive of the project, which you can prove by locking away your coins to run the masternode. In truth, you can usually remove the coins and close down the masternode whenever you wish.
Once you have your collateral you need to let the blockchain know you want to act as a masternode. There are two ways of doing this – you can either set the masternode up yourself, which requires a computer (some masternodes can run on a Raspberry Pi), a little technical knowledge, and about half an hour of your time. Or, you can use masternode platforms such as Gin and NoseBase which do the heavy lifting for you, for a small fee.
Some newer projects have produced alternative types of masternode, but all will involve putting away a number of coins and setting yourself up as a node in some way. Each project will have a guide as to how to set up your masternode, and once you’re done you’re ready to start earning.
How Much Will I Earn?
Masternodes pay out at regular intervals, often multiple times daily, into the wallet from which you’re running the masternode. You can then sell these coins on an exchange, or hold them as you wish. How much you will earn however varies greatly depending on a number of factors, which we’ll break down here:
Coin value – The most crucial variable. As we’ve seen, coins vary tremendously in value during market cycles (at one point in January 2017 a Dash masternode paid out the equivalent of £108,000 per year). Do not rely on masternodes for a reliable, consistent income stream.
Number of masternodes – Rewards are split across all the masternodes equally, so the more masternodes there are the fewer rewards each will receive.
Blockchain use – Some projects calculate their masternode reward output based on how much the blockchain is used. So a popular blockchain with lots of transactions that require verification will pay better than one that is rarely used.
What Makes a Good Masternode?
This depends hugely on what your aims are. Some people buy up several masternodes’ worth of brand new coins, generate as many coins as they can and then sell the whole lot, masternodes and all, when the price goes up enough. In this case the quality of the project doesn’t matter very much. Others look to the long term and buy up masternodes of projects they feel will be big in years to come and lock them away, so when the time comes they have the collateral all ready to start operating, having bought them for relatively little at the time.
In the middle are those that buy one or two masternodes of reasonable quality during bear markets and hold them. This allows them to generate coins all the while, for several months or years, until the market turns around and they can begin to sell. In these cases, reputable projects that can survive a bear market are required, which isn’t always easy to predict.
The Future of Masternodes
As blockchain starts being used by companies and individuals on a regular basis, some masternodes will become extremely lucrative. One or two ‘unicorns’ may arise from the mass of projects and provide enough passive income for masternode owners to live on. As time goes on and adoption increases, masternodes will inevitably receive more attention given the little work required for potentially considerable income, not to mention the collateral itself that could be worth a small fortune one day if you choose to sell it.
Everyone wishes they had bought Amazon and Apple stock after the dot com crash. We’re coming towards the last throes of a monumental crypto crash, yet the fundamentals have never been stronger. Find the right project now, invest in a masternode, and you could be one of those smug ones saying not only that you did you buy the next Apple or the Amazon, but that you’re being paid every day for the privilege.