What is a Masternode?
Masternodes are “servers” in the cryptocurrencies network that relay transactions and sometimes also fulfill other specific functions.
Since Masternodes fulfill special functions for a cryptocurrency network but do cost money and effort to operate, they are incentivized by gaining a share of the block rewards in their respective cryptocurrency. The yield varies primarily according to the masternode count and each coin might have different payout periods. A few coins pay out daily; others pay out several times a day.
This makes masternodes a form to earn “passive income” on cryptocurrencies without having to run expensive mining equipment. To create a masternode, a user needs to lock in a specific amount of
coin. Users can then either setup a server to host the masternode or ask a service provider to do so on their behalf.
Masternodes are different to normal full nodes, because they perform several other functions apart from just keeping the full blockchain and relaying blocks/transactions as a full node does in Bitcoin/Litecoin.
Some of the special functions that these nodes perform are:
- Increasing privacy of transactions
- Doing instant transactions
- Participating in governance and voting
- Enable budgeting and treasury system in cryptos
These masternodes are not standalone but they are always communicating with other such nodes to make a decentralized network and are often referred in short form as MN.
Note: Mostly the masternodes perform the tasks that I have listed above but it can slightly vary from cryptocurrency to cryptocurrency depending upon how masternodes have been implemented. But more or less they perform these functions in a cryptocurrency.
How much can I earn from hosting a Masternode?
Masternodes cost money and effort to host so they are paid a share of the block reward to incentivize them. Most Masternodes earn between 5-20% reward. However, as the value of the cryptocurrency is rising and the supply goes down, masternodes should still be sufficiently incentivized.
What is required to host a Masternode?
- Specific Amount of Coins locked: Arguably the hardest part. You must lock a specific amount of coins in your wallet in order to be eligible to host your Masternode. Sometimes you must lock 1,000, 5,000 or even 10,000 Coins. These numbers can differ from Coin to Coin.
- A server or a VPS installed with Linux: In our Masternode Setup Guides we will be using Ubuntu OS. We recommend cheap VPSes such as from Vultr. Generally a low specced one will do. I use the 5 USD ones from Vultr and they work fine.
- A dedicated IP address: These usually come with the VPS/server.
- A little time: When I first got into masternodes, there were only a few guides around and did not cover all the scenarios. It took days for me to figure out the best ways to do everything. However, the process now takes a few minutes. Here are a few guides that I hope will make the process a lot easier.