Masternodes: what they are and how to earn from them

Masternodes based on the PoSe* consensus algorithm have become an alternative to classic PoW mining. Instead of buying hardware, users can run their own node on their PC and become fully fledged ‘miners’, with the ability to ‘mine’ new blocks.

We explain what masternodes are, what role they play in a decentralised network and what types exist, as well as how to earn from a masternode.

What is a cryptocurrency masternode?

A masternode is a full node or a crypto wallet with extended functionality that stores a full copy of the blockchain and synchronises with the network in real time. In other words, it is continuously updated via p2p connections with other nodes and runs 24/7. Such nodes are also known as supernodes: they perform server functions for a blockchain and can process transactions, receiving rewards in cryptocurrency for doing so.

By comparison, ordinary nodes do not store a full copy of the blockchain, but they can perform mining functions. If ordinary nodes can be thought of as workers, then supernodes are managers who can handle a wider range of tasks that are not available to ordinary and even full nodes, for example:

• Sending instant transactions (InstantSend);
• Private transfers (PrivateSend);
• Usernames (DNS) in the blockchain network, which are used instead of complex addresses;

We will describe these extended features in more detail in the next section. A masternode is also an online guardian that contributes to the blockchain ecosystem and ensures network security.

The most popular masternode coin — DASH

The cryptocurrency DASH became the largest and one of the first coins to offer a blockchain with masternodes. It is currently ranked 183rd on CoinMarkatCap, with a market capitalisation of over $332 million. Dash is traded on many major exchanges and is supported in almost all multi-currency wallets.

The name Dash comes from the words ‘digital cash’. The cryptocurrency appeared in 2014 as a hard fork of Litecoin (LTC). However, Dash developers moved away from PoW by introducing a two-tier PoSe blockchain model with masternodes. They also changed transaction mechanics: when sending DASH, transactions are mixed into groups, which prevents tracking the addresses of senders and recipients.

The Dash network operates on two levels:

• Level 1 — a classic PoW blockchain, where miners mine blocks and record transactions.
• Level 2 — a network consisting of supernodes that perform special functions not available to Level 1 nodes.

The second layer is supported by masternodes, which provide transaction privacy thanks to the CoinJoin feature (transaction mixing), as well as decentralised governance and financial distribution.

How Dash’s two-tier network works

When miners mine new blocks, masternodes also receive rewards. To become a masternode, a user needs to run their own node on a PC and stake DASH (staking). Rewards are distributed as follows:

• 45% of rewards go to miners for the mined block;
• 45% are paid to masternodes in proportion to the staked amount;
• 10% is reserved for the budget system, which is created via superblocks.

How Dash’s masternode system (PoSe) differs from Proof of Stake (PoS)

First, full nodes in PoS blockchains, which are called validators or node operators, do not perform extended functions such as instant transactions or transaction mixing. 

Second, masternodes do not require coins to be locked, whereas validators in PoS networks freeze coins in order to gain the right to verify and add blocks. As a rule, coins are also unavailable for some time after unfreezing, and users cannot make wallet transactions during this period. This is known as the unbonding period or the unstake period.

InstantSend

This feature allows coins to be sent to other users instantly. InstantSend helps avoid lengthy transaction verification, while still allowing miners and masternodes to ensure there is no attempt at double spending or reversal, without violating the decentralised principles of the blockchain.

InstantSend enables cryptocurrencies such as Dash to compete with traditional payment systems — for example, bank cards that work almost instantly — without relying on trusted third parties.

Unlike PrivateSend, InstantSend is supported in many DASH wallets. You can find instructions for using InstantSend in Dash documentation.

PrivateSend

This is the feature that allows transactions to be mixed, obscuring the trail between counterparties on the blockchain. When sending private transactions, it is impossible to trace their origin. This process happens automatically and is not controlled externally, so third-party nodes cannot interfere with it. However, this feature is only available in the original Dash Core wallets.

You can find instructions for configuring and using PrivateSend in Dash documentation.

Setting up a masternode and earning income

Setting up a DASH masternode yourself requires specialist knowledge. The technical documentation will help you with this. Here we briefly outline the steps required to launch a masternode.

• Step 1. Configure the server and OS. Make sure your PC meets the system requirements listed below.
• Step 2. Install and synchronise the Dash Core wallet with the blockchain.
• Step 3. Generate a BLS key pair and connect to the masternode. To access the masternode, you need to enter the Private Key obtained from the BLS key pair.
• Step 4. Prepare and sign the ProRegTx transaction. This step is possible if you have access to a DASH wallet.
• Step 5. Broadcast the ProRegTx transaction to the network. After that, the masternode will start operating, and you will begin receiving income.

DASH masternode requirements

The minimum staking amount is 1000 DASH. At the exchange rate at the time of writing, this is about $28,380 — an unaffordable amount for many users, not to mention the risks.

A server or VPS (virtual private server) on Linux Ubuntu. Dash developers recommend using a VPS from Vultr or DigitalOcean. It is important that the provider is reliable and trusted. System requirements for nodes are not high, but they will increase as the Dash platform develops. Also, a dedicated IP address.

System requirements

How to choose a PoSe cryptocurrency for investing

To choose a promising cryptocurrency, it should meet the following criteria:

• It does not look like an obvious scam. This is easy to spot. As a rule, such projects’ channels and chats are inactive or full of unfiltered spam, and there are almost no updates.
• The project is developing. Developers are active, follow the roadmap and regularly release platform updates.
• The project has a large community. Solid platforms quickly build a community with a friendly atmosphere and mutual support. They are actively discussed on forums and social media. As an example, consider Chia, which is widely discussed online.
• The cryptocurrency is supported by many wallets. Popular crypto wallets such as Trustee Plus will not add dubious coins.
• The ecosystem promotes features that are useful to society. For example, the PIVX coin burns all transaction fees, restraining inflation.
• Use trackers such as Masternodes Online. As a rule, they do not add scams to their sites, but they do not guarantee the integrity of owners either.

These criteria are sufficient to choose a worthwhile project and avoid falling into scammers’ hands.

Masternode profitability

Supernode yields can vary significantly between projects. For example, Dash masternodes offer a yield of ~8% according to Masternodes Online, while Sapphire offers ~28%.

Overview of share sales and hosting services

Since the conditions for running masternodes are far from accessible to everyone, you can use a shared hosting service. It is enough to buy a share for a small amount to receive income from masternodes. Once the service accumulates the required amount to launch a masternode, all participants will start receiving rewards.

A list of share sales and hosting services recommended by the Dash community:

• CrowdNode — free hosting, but charges a 15% fee on paid rewards.
• Allnodes — provides hosting services only.
• Node40 — does not offer shares, but gives participants voting rights and helps with tax calculations.

Advantages and disadvantages of share sales and hosting services

The advantage is that you can receive masternode rewards by paying a small amount. At the same time, you do not need to learn the technical basics or configure software to run masternodes.

The main drawback of these services is the limitations. You may not be able to withdraw your cryptocurrency at any time, but only after a certain period ends. In addition, you have to trust funds to a third party, so you take on risk if the company goes bankrupt or decides to appropriate the coins.

List of the best masternodes

Not all, even proven masternode projects, are equally good. Much depends on crypto market trends and the focus of the blockchain community. Nevertheless, we have selected a few projects that, in our view, seem acceptable.

Masternodes: a list of the best cryptocurrencies to invest in

1. Dash (DASH). Without a doubt, this cryptocurrency belongs in any recommended list. Despite a steep decline, the project has real-world applicability and strong long-term prospects.

2. Flux (FLUX). A people-powered network designed to help build decentralised applications with greater flexibility, scalability and censorship resistance.
3. Ontology (ONT). A high-speed, low-cost public blockchain that provides decentralised identity and data transmission solutions for Web3.
4. Beldex (BDX). A privacy-focused ecosystem whose goal is to create the world’s largest autonomous, interoperable and decentralised application, free from censorship and protecting users’ privacy.
5. Syscoin (SYS). An L2 solution for Bitcoin and a modular Proof-of-Work blockchain solution that brings rollups to Bitcoin.

Conclusion

Which masternode is best is for you to decide. Remember that investing in cryptocurrencies involves a high risk of losing funds, and even the most promising projects may fail to meet expectations. The best strategy is to follow risk management rules and invest only money you can afford to lose.