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Masternodes: The Complete Guide

What Is a Masternode?

Masternodes serve as the backbone for Proof-of-Stake (PoS) based cryptocurrency blockchains. They run on computers with digital wallets that support the network of a particular coin. Unlike Proof of Work (PoW) coins, like Bitcoin, masternodes perform functions outside of record-keeping and validation such as:

  • Increasing privacy of transactions
  • Participating in governance and voting
  • Enabling budgeting and treasury systems
  • Filtering transactions and blocks for lightweight nodes

The emergence of the Proof-of-Stake model for cryptocurrency not only created a more energy-efficient consensus mechanism but a new method of passive income as well. It became possible to generate additional staking rewards just for holding a particular coin. These rewards are a percentage of network transaction fees distributed to masternode operators that support the network.

Many coins opted for such a model, some even promising up to 20,000% yearly rewards to host their coin's masternode. With the massive pump at the end of 2017, holders were handsomely rewarded. However, things today are quite different. With the euphoric exuberance of the ICO craze behind us, liquidity is increasingly flowing to the top coins from the rest of the market. Meanwhile, most ICOs have died off. Therefore, while masternodes can be a source of passive income, rigorous due diligence is critical. Merely looking at potential ROI (return on investment) can be a recipe for disaster.

How to Set up a Masternode?

While anyone can run masternodes, there are certain barriers to entry. One such barrier is the collateral in the amount of a particular coin that is needed to run a masternode. This requirement helps reduce malicious attacks by ensuring each operator has a stake in the coin's success. The collateral requirement also creates a natural disincentive for operators to sell off their coins instead of supporting the network. Other requirements include:

  • VPS or server to host the wallet with a dedicated IP address
  • Technical know-how on how to set up and maintain the system
  • A 24-hour internet connection and server uptime
  • Enough storage space to save the blockchain

Ultimately, operating a masternode is a one-off cost and does not require renewed investment in specialized hardware. Operators need only to maintain a particular amount of a cryptocurrency to participate. Remember, high ROIs on reputable coins will tend to attract more masternode operators, resulting in higher coin prices and reduced rewards. The decrease in the tradable supply of a coin will result in downward pressure on masternode returns.

How to Choose the Right Coin to Stake?

When choosing the right coin to create a masternode, there are five main questions to be asked:

  1. Does the project have a utility and a good future (right team, progress, news, etc.)?
  2. Does it have adequate liquidity in case I ever need to sell my stake?
  3. What are the potential returns and capital requirements?
  4. How long has the coin been around, and is it still relevant in the market?
  5. How active is the company ( social activity, Github, Discord etc.)?

Examples of Masternode Coins

Below is a list of the top coins we have compiled based on this criteria. For a complete list of projects that have maternodes, you can visit this website. Please note that the data below is subject to change as market conditions vary from day to day. By the time you read this article this data will most likely be different.

Coin: Vechain
Profile: Platform Coin | Daily Volume: $24.8m
Potential Return: 2.97% a year. Pays dividends in VTHO (See calculator here)
Capital Requirement: Different Offerings (See here)
Comments: This coin focuses primarily on solving problems for the supply chain management industry. Unlike other coins, it offers a variety of different types of nodes one can run with different amounts of collateral. While a predefined amount of tokens needs to be held by an operator, a simple mobile wallet is sufficient instead of all the typical masternode requirements listed above.

Coin: Dash
Profile: Privacy Coin | Daily Volume: $158m
Potential Return: 6.38% a year
Capital Requirement: 1,000 coins = $108,379
Comments: Dash is a privacy focused cryptocurrency coin that is open source. It allows for fast, anonymous and untraceable transaction. Initially a fork of Litecoin, Dash was the first coin to offer masternodes.

Coin: PIVX Masternode
Profile: Privacy Coin | Daily Volume: $515k
Potential Return: 11.06% a year
Capital Requirement: 10,000 coins = $4,831
Comments: This project also offers governance, participation and voting. However, to run this masternode, all requirements listed above need to be met (24/7 internet connection, dedicated IP address, etc.)

While masternodes require collateralized obligations, certain projects will provide dividends no matter how much of the coin you hold. The only requirement is that you hold them in a specific wallet or on a particular exchange. For example, you can still generate GAS from NEO by holding it on the Binance exchange.

Coin: NEO
Profile: Platform Coin | Daily Volume: $286m
Potential Return: 4.62% a year. Pays dividends in GAS (See calculator here)
Capital Requirement: None
Comments: Also known as the "Ethereum of China," NEO has had various interesting projects built on top of it. Currently, NEO does not require any predefined amount of coins to be staked. The project aims to create a "smart economy."


DISCLAIMER: The Content is for informational purposes only. You should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing here should constitute a solicitation, recommendation, endorsement, or offer by Jibrel or any third party service provider to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction.

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