What is a Masternode?
A masternode is a cryptocurrency or coin, full node on a computer. Basically this means a digital encrypted wallet that keeps a full copy of the blockchain (all transaction information ect) in real time, holds a certain amount of coins locked in that wallet and uses those locked coins as collateral for the masternode to keep the network safe.
Every time a transaction is made the block information is distributed to all masternodes and they are rewarded for doing so. This is the basis of a Proof of Stake (POS) blockchain.
Masternodes are not standalone and are always communicating with other such nodes to make this decentralized network and are often referred in short form as MN.
As they require little maintenance once setup Masternodes can be a great passive income for companies and individuals alike.
Masternodes can be a great investment, however there are many factors to consider when choosing which one to purchase.
1. Return on investment (ROI)
This are the first thing most investors look at as it is the basis of the return you will see and it is usually the first benchmark to see whether it is worth even looking into investing in. When a masternode is first birthed the ROI is at a very high number as there are few masternodes and the rewards are split between each masternode, this can give a false pretence to the long term rewards of the node and should be looked at in correlation with the other main purchasing consideration factors.
One of the most obvious factors to consider is the price of the masternode, which is calculated by the cost of each coin to purchase times the amount of coins required to hold. At birthing stages a masternodes coins may be very overvalued or undervalued depending on the product/use-case alongside other factors and deducing its actual value prior to it balancing out over time can be difficult (but not impossible) to do even with background industry knowledge. It is advised if you do not understand the industry to seek assistance when looking into new investments in masternodes.
3. Market cap
Make sure there is a comfortable level of stability for the masternode based on the total dollar value of the total number of coins. I usually try to only invest in masternodes with a market cap of over $200,000-$300,000 for smaller/newer investments and $1,000,000 for larger/more mature investments.
The dollar value of the coins being traded in the currency lets you know of the liquidity and the larger the volume, the easier it will be to sell the coins, which is crucial for when you want to exit. If the volume is too low it will be more challenging to sell and if the devs decide to dump the coin you may find yourself stuck “holding bags” of coins worth nothing, unable to sell them.
5. Number of Current Nodes Active
The amount of nodes that exist has a direct impact on the frequency of rewards you will receive. The lower the number of nodes that exist the higher the frequency of rewards you will receive as the rewards (which are calculated by algorithms) are split between the masternode holders. Therefore the more nodes that exist the less rewards you will receive. As a masternode becomes more popular and more are set up the rewards become less frequent, on the other hand the more popular the masternode becomes (especially if it has a viable use case and working product) the higher the value of each coin becomes increasing your holdings value and making it easier to sell.
6. Masternode Maturity/Life-Cycle
It is important to take into account the age or maturity of the node. Younger or less mature nodes have a higher level of susceptibility as the community has less confidence in a younger node, making it more likely to be easily shaken when market changes or people selling large amounts of the coin causing the price to drop.
This can cause a snowball effect on the coins market in respect to individuals “panic selling” due to fear of the coin crashing all together and them losing the value of their investment and getting stuck “holding bags”. However the more mature a node is, the safer it becomes as potentially the use case idea will have developed into a working product, adding value and stability to the coin.
7. Use case/Working product/Real-Demand?
A masternode of a coin is only worth what people are willing to pay for it. This means the stronger a coin looks, the better or more attractive it is for investment. Having a viable use case and working product is one of the most important things to consider when looking for the right masternode to invest in. Many new masternodes don’t have a working product yet as the masternode stage is one of the first steps in creating a new “Proof of stake” coin. It is crucial to do your research on the use case of a masternode before investing in one.
As cryptocurrencies are still mostly unregulated many masternodes are created with no intention of ever actually having the use case implemented and are simply “pump and dumps” designed to make the developers of the coin a large amount of money before the sell the portion of coins they own, usually plummeting the value of the coin and subsequently the masternode into the ground. Being able to determine the risk level is something that only comes with industry experience, considering many different factors in the deduction of a new investments viability. On the other hand if there is a good use case or a working product already in action it can have a fantastic impact on the price of the coin. As the price if the coin increases so to does the value of the masternode and also the value of each reward, resulting in a very positive reflection on your portfolio.
8. Community/Developer Activity
One of the most important parts with all masternodes is the level of developer activity within the community channels. The support network is crucial to people setting up masternodes and having faith in the project as it shows the level of ongoing involvement from the team in the coin. If they are not active or have a very low level of activity it can indicate a lack of concern about the future of the coin since they are not trying to help build their own product. This would tell us that they may not have any interest in keeping the forward movement of the coin but instead intend to take the profit that they have made thus far and leave the project in a state of limbo, inherently causing a whole lot of people to be left holding bags of coins that are not going to be doing anything in the future.
On the other hand if they have a great support network for newcomers, bounties for potential bugs to be found or just general enquiries etc, this would show a team that is dedicated to making that coin work. This alongside a good product/use case is a strong signal that they will be continuing to grow the coin and therefore the economy that surrounds it. As you can imagine that would build more faith and trust in that coin with the community and potentially strengthen the price and market confidence.
Masternodes coins can drop or “tank’ in price for a range of reasons including;
- The coin or currency can take a dive following market trends, which it can come back from provided it is still viable after the market drop.
- The developers can “dump” their holdings of the coin to take profit all at once which will plummet the price of the coin on exchanges, (pump and dump).
- The coins price can drop due to technical failures of the system or a lack of forward advancement in the progress of the coin resulting in a loss of confidence in the project.
- Competitors can spring up, offering a superior product.
- Funding/budget issues caused by mismanagement can effect the coin price.
- Internal disputes within the team can cause a project to halt or stop progressing altogether.
- Legal legislation updates can cause coins to become obsolete in a certain country.
- A large scale investor or “whale” could purchase a huge amount of a coin with the intention of manipulating the price for their own benefit.
Are Masternodes Safe?
With large POS run currencies (top 100) it is very expensive to purchase enough coins to create a masternode, this inadvertent fact helps keep the network decentralised as it would take an incredible amount of money to buy enough masternodes to have a monopoly on them. Even for your highest tier investor it would be extremely expensive if not impossible to do.
Also the larger the scale of a masternode coin the better/more stable the team will be (generally) which means that the less likely it is to fail to team/dev/technical isues. All these facts tell us that the bigger a masternode coin is, the less susceptible is will be to the above kind of failures.
What is the purpose of an Masternode?
When a masternode is online and running correctly some of the basic functions are processing instant and/or anonymous payments, enabling a decentralised and secure governance system that allows node operators to vote on important developments regarding that coin on the blockchain, facilitating budgeting and treasury systems in cryptocurrencies along side being the security and record of information for the currency while generating rewards for the owner of each masternode.
As compensation for their efforts, masternodes receive a percentage (the earlier the higher the percentage generally) of the block/transaction rewards which they share a portion of with the miners and the balance of that percentage usually goes to the blockchains’ treasury fund, depending on how they are setup. Operators are in charge of voting on proposals for how these funds will be used to improve on the network.
It is important to note that just holding the correct amount of coins is not enough to run a masternode. Each currency has its own guidelines for maintaining a one, and if these conditions are not met or the currency is moved from its staking position, the masternode will cease operating.
How do I Setup a Masternode?
If you decide to purchase a masternode you would start by downloading the currencies wallet, sending the required collateral, installing the masternode on the server and starting the masternode in the wallet. This process requires a relatively high level of computing knowledge so if you do not possess such knowledge it would be wise to use a third party to have this done for you.
After you setup the masternode as a server, the wallet integrates your computer alongside the VPS (recommended), as one of the nodes that supports that currency on the blockchain.
Vultr is my personal favourite for price/quality for VPS hosting
Masternode Security Risks
As masternodes and proof of stake systems are still new in relation to the mainstream, there is a lot of skepticism surrounding the area, and rightfully so. If done incorrectly or using a “badcoin” you can most certainly lose money, but as with any investment there is an element of risk involved, therefore you should NEVER invest more than you are willing too lose. The way to stay safe in this area is to have a correct and informed understanding of what it is you are investing into by using credible information from validated sources.
Still not sure?
If you would like advice on masternodes or to have one setup and maintained Cryptolab offer a setup and monitoring/maintenance service which you can utilise by contacting our team anytime.