We published an article a few weeks back describing various options for passive income in cryptoassets, to benefit from gains in the underlying asset as well as, hopefully, gains in fiat-equivalent value. As that article shows, there are a number of methods of achieving this with differing returns on investment, and one option which might appeal to many is the establishment of a masternode. There are over 500 cryptoassets which utilize masternodes, which can be compared for market cap, volume, % return-on-investment and minimum required balance here.
The passive income article mentioned some of the benefits masternodes bring to a blockchain, but here we will go into detail on how those benefits work in practice with reference to the first and most notable example of a masternode-equipped blockchain, namely Dash. Dash uses a hybrid proof-of-work (mining) and proof-of-service (masternodes) consensus model, with rewards evenly split between miners and masternodes (along with 10% of rewards allocated to its DAO). As we will see, the masternodes facilitate considerable innovation for the Dash network, for which they earn passive income paid in Dash tokens.
As the name suggests, Dash’s unique selling point is its speed relative to Bitcoin and other crypto assets in general. Dash blocks are created every 2.5 minutes, compared to Bitcoin’s 10 minute block rate, and as a result it is four times faster in processing payments. Masternodes go even further than this, allowing for a feature called InstantSend (formerly InstantX), which will process a transaction in 1.5 seconds while still preventing double-spend issues by locking the specific transaction from any further processes until a full block is completed. There is a larger recommended fee for a transaction of this type, but the potentials for on-demand instant transactions are obvious, even if standard Bitcoin transactions are already orders of magnitude faster than other cross-border payment methods.
Dash has a comprehensive privacy feature called PrivateSend (previously DarkSend), which also makes use of masternodes. In this feature, an individual sends funds to a masternode which breaks it into denominations, and mixes it with the denominations of others also using PrivateSend, before sending it back to a “change address” the user controls, from where he or she can send the funds, which are now much more difficult to trace. It is the existence of private send which has led Dash to be called “selectively fungible” as one can send mixed or unmixed coins based on preference, for example if a vendor will not accept funds that have used PrivateSend in the past.
Voting & Security
In Dash’s governance structure, miners have no vote but masternodes do. Although this might seem like a benefit for masternode owners than for the network itself, there is a legitimate argument for why this is beneficial. Miners do not need to have any stake in the currency they are mining. Indeed, they can switch between currencies they feel will be most lucrative at will. Masternodes require a minimum stake — with Dash this is 1,000 coins. As a result, all masternode operators have a vested interest in the success of the platform, and are much less likely to act nefariously and risk the devaluation of their stake. This is a similar logic behind extant and upcoming proof-of-stake consensus algorithms, a process Ethereum is long expected to implement.
There are many, many more masternode platforms which utilize them in different ways, some boasting absurdly high returns-on-investment compared to Dash. However, as with most things that seem too good to be true, any masternode currency promising hundreds of percent gains will almost certainly fall victim to hyperinflation and, in many cases, death of the currency. @JiuCrypto published an article detailing the dangers of high ROI masternodes and staking currencies, which demonstrates the immense devaluation many of these currencies observe. As he suggests, many factors need to be considered before investing in a masternode, balancing the ROI with the importance of masternodes for the blockchain in question and of course the innovation of the project as a whole.
The emergence of Dash was mired by controversy regarding the mining of 2 million coins in the first two days, by founder Evan Duffield and another anonymous user. This was seen as unfair launch protocol, and although advocates of the currency argued for a hard fork to undo this, none was forthcoming. This is something of a shame considering the undeniably impressive features of the platform, like its rapid transaction times and innovative privacy features. It can be anticipated that masternodes will, though perhaps with a different name, be implemented in more blockchains in the future which will also make use of their potential for innovative features.
Viewnodes helps clients establish and maintain masternodes for the currencies which currently support them. To contact us for information on our masternode services, please submit this contact form.
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