The term node isn’t new to digital technology — it stands for a single device that contributes to the performance of a larger network. In the decentralized ecosystem of cryptocurrency, nodes are vital. They serve as blockchain hosts and security guards for all transactions that take place on the network.
A crypto node can be any device with an internet connection and storage capacity to contain a copy of the blockchain. Nodes are connected with the software of their native blockchain and аlways synchronized with each other. That’s how they validate transactions that take place on the blockchain network.
But isn’t this the same definition as that of crypto miners? Not exactly. All miners are nodes, but not all nodes are miners. This means that the nodes can also serve other purposes in the process of decentralization. More precisely, the primary role of the nodes is to relay information from users to miners.
The exact purpose of a single node depends on its type. There are different types of nodes and different types of blockchain mechanisms. In this article, we’ll cover the ultimate category — masternodes. Moreover, we’ll provide you with a step-by-step guide on how to set up your own masternode and land a “blockchain job” without mining.
How Do Nodes Work?
The blockchain is a complex infrastructure that operates without a single centralized server in the back. However, it maintains high integrity and transparency by involving all network participants in the process of confirming the transaction validity. This is what we call achieving consensus or group validation.
In simple terms, a consensus is a set of rules that a single blockchain follows to provide maximum transaction security, prevent double-spending, and disable any type of scams or arbitrary modifications of the ongoing transaction. This type of decentralized governance can be incredibly convoluted, involving a vast number of users and transactions, so there must be an algorithm to “move” the consensus.
The first algorithm was the Proof-of-Work (PoW) of Bitcoin, followed by many other upcoming crypto projects. The other blockchain algorithm is Proof-of-Stake (PoS) and it works differently from PoW in terms of nodes’ tasks and requirements. PoS is very popular among the trending DeFi protocols, and even the second-largest blockchain, Ethereum, is on its way to adopting PoS as a more efficient and scalable solution. However, both PoW and PoS aim at achieving the same goal and count on nodes to enforce the “blockchain laws.”
So regardless of the algorithms and the arsenal of hardware equipment in the back, all participants are represented on the blockchain by their computers or nodes. That’s why we say that the nodes are what the blockchain is made of. Now, let’s see what types of nodes different blockchains employ.
Full vs Lightweight Nodes
Because of the diversity of existing blockchains, we can count up to 10 different types of nodes. However, now that our focus is on masternodes, we’ll discuss only those that find an application across all types of blockchains. As you can see, masternodes don’t belong to this group of universal nodes.
In a nutshell, full nodes store the entire blockchain. This includes the history of all transaction records, updated in real-time with every new block attached to the blockchain. Reasonably, this “package” occupies a lot of memory. For instance, the Bitcoin blockchain has already exceeded 300 gigabytes, while the Ethereum weighs over 900 GB because of the large number of use cases such as dAPPs, ERC-20 tokens, and NFTs.
To set up a node, we use programs called clients, which feature built-in wallet functionality. For example, the most popular full node client on the Bitcoin blockchain is Bitcoin Core. So, Bitcoin miners are full-node clients by default. They need the entire blockchain in the process of “taking care” of the blockchain by actively verifying, validating, and storing transaction blocks on the blockchain.
Crypto users who use the blockchain for sending and receiving crypto coins don’t have to be full nodes. Instead, they store only a part of the blockchain, hence the name lightweight nodes. However, in order to establish an interaction with the blockchain, light nodes must be connected to a full node, which will follow all your blockchain activities. That is why not only miners but also advanced traders and crypto-friendly businesses have to become full nodes, i.e. download the entire blockchain to monitor all traffic against the rules of the particular protocol consensus.
What Is a Masternode?
Technically, masternodes are full nodes with added functionality. However, they can perform a variety of functions that regular nodes can’t. Their core role is to make the blockchain a more effective decentralized environment by helping users to:
- Execute instant transactions;
- Participate in the governance of particular decentralized protocols and networks;
- Deliver more private transactions.
For providing these “services,” masternode operators receive rewards in the native currency of the operating blockchain.
Serving as a second-layer network, masternodes are also called bonded validator systems, and they are usually part of PoS-fueled blockchains or blockchains that are built on a hybrid (PoW and PoS) consensus mechanism. However, you can see masternodes in various shapes and sizes, depending on the consensus mechanism.
Some of the more attractive masternode options belong to the blockchains of the following cryptocurrencies: Dash (DASH), Pivx (PIVX), Smart Cash (SMART), Fyro (formerly known as ZCoin), Chaincoin (CHC), Stakenet (XSN), and Syscoin (SYS).
How Does Dash Masternode Work?
The most successful masternode story is associated with Dash (DASH) — a long-lasting Bitcoin fork, formerly known as DarkCoin and XCoin. Dash was designed in 2014 to provide instant and anonymous payments. One of the system’s best mechanisms is the presence of masternodes, which have a very similar role as Bitcoin full nodes, excluding mining.
Dash masternodes are classified by a deterministic algorithm that creates a pseudo-random order. Once appropriately arranged, they work together with Dash miners in a coordinated manner to ensure safe ground for all DASH transactions. Masternodes enable users to access the crypto-based payment providers CoinJoin, InstantSend, PrivateSend, and governance services organized by DASH.
The DASH block reward system is very generous to its node operators. While 10% of the rewards go to the development and governance fund, the remaining 90% is split between masternodes and miners.
The “game rules” are simple — the system selects masternodes from the deterministic order, and when the mining session ends, the chosen masternodes get paid and go back into the waiting line. The higher the number of masternodes, the longer the interval between the payments. The masternode has to be running all the time. If they go offline for more than an hour, they will be removed from the queue until they get back to operational mode.
That’s part of the strategy of how the Dash network maintains decentralized consensus. To reduce the risk of imbalanced reward distribution, Dash has set up a strict criterion for becoming a masternode. Namely, each masternode has to leave 1,000 DASH units as collateral. Serving as an inflation wall, this amount is “locked” and inoperable during the service. This means that if the masternode spends, trades or otherwise removes the coins, they will also be removed from the reward waiting list.
How to Set Up a Dash Masternode?
The masternode setup is relatively straightforward, but you may find the process overwhelmingly long and demanding. Also, let us remind you that the entire workflow requires basic terminal usage.
To set up a Dash masternode, you’ll need the following equipment:
- 1,000 Dash units
- a computer with a dedicated IP address and uninterrupted internet connection
If you don’t have the required amount of coins, you can easily buy Dash on several entry-level crypto exchanges in Canada in exchange for CAD or other altcoins in your possession. When it comes to the hardware part, your computer can be a home setup with a commercial operating system (Windows, Linux, Ubuntu, etc.), either desktop, laptop or ODroid XU4 — technically, they can all do the job.
However, for better efficiency, you should rely on cloud hosting services, i.e. either on Virtual Private Servers (VPS) such as Vultr, Amazon Web Servers, and Digital Ocean or on a masternode-specific VPS like Node40, Masternode.me, and Splawik’s.
The setup process consists of multiple stages, and you can find a detailed and visualized guide on the public GitHub account of Dash. To get the bigger picture, we will walk you through the basic steps you need to pass to become a masternode host.
- Prepare your Dash wallet then download and install DashCore.
- Set up a reliable Virtual Private Server (VPS). As this step requires more exhaustive work, you can find a separate guide on GitHub.
- Generate your masternode key and address on DashCore.
- Fund your new address with the collateral of 1,000 DASH.
- Create a masternode.conf configuration file on your local computer
- Activate your masternode(s) and test the setup.
How Much Can I Earn Running a Masternode?
Depending on the crypto coin, masternode operators can earn anywhere between 5% and 20% per block. As the most popular option, a Dash masternode receives around 7% of the collateral as annual profit.
However, these percentages translated in USD or CAD are highly variable because of the volatile crypto climate. Certainly, you can’t enter a masternode project without carefully calculated ROI, which stands for the proportion of your initial capital and the percentage yield.
The thing is that even if the estimated ROI signals 100%, the cryptocurrency may not reach the desired liquidity and market value. The opposite scenario is also possible. The cryptocurrency project may alert a high-risk score and/or offer a discouraging percentage yield, but if the crypto asset makes a market boom, your initial investment will pay off in spades.
A Few Words Before You Go…
Masternode coins are available on limited blockchains, and hence, they haven’t reached their full potential yet. However, being a masternode operator can be a great alternative to crypto trading and mining in the long haul. Running a masternode requires a one-off investment, modest hardware equipment, and low energy consumption.
Their operational model isn’t tailored for miracles to make you a crypto billionaire overnight. Still, masternodes can be a reliable source of steady payouts and long-term passive income as long as the native digital asset is doing well on the crypto charts. Overall, running a masternode isn’t a risk-free investment, but it’s definitely less painful than speculative trading and less expensive than hefty ASIC mining rigs.