I first started becoming interested in masternode coins when I saw the incredible jump in Dash coin’s price over the past month. After that, I started tracking a number of other masternode coins and realized that they would all see tremendous spikes in price even during times of relatively low volume. What was driving this? And what is this magical masternode concept?
Before we jump into masternodes and companies that are implementing them, let’s do a quick review on regular nodes and miners to see how they all play together.
Nodes are an essential part of the network since they keep it distributed and decentralized. Nodes are a peer to peer network of computers that store a full copy (history of all of the transactions) of the blockchain. Remember, we are moving away from our dependence on 3rd party intermediaries like banks. Nodes also verify transactions on the blockchain to ensure that they follow the rules of the protocol (IE. does the person sending the money have enough in their account? Does it have a valid signature) Finally, nodes propagate (think of it like a giant game of telephone) the transactions to other nodes and miners in the network so that everyone is aware of the transaction. Until the transaction is added to the blockchain, it remains in a pool of unconfirmed transactions (Mempool).
Now, in order to confirm the transactions we need miners.
Miners take unconfirmed transactions and bundle them into a block. At that point, they begin “mining the block “or conducting “proof of work.” The mining process is essentially specialized nodes that are trying to solve a very difficult math problem that takes a lot of computing power to solve but is easily verifiable. A great anology for mining is like a Sudoku puzzle. Difficult to solve, but easy to verify. As more miners join the network, the Sudoku puzzle becomes harder and harder to solve, but still very easy to verify. I got that analogy from the real Bitcoin Jesus, Andreas Antonopoulos. He dives in a little deeper here. Once a miner solves a block, they propogate it to the rest of the network through all the other nodes.
You need mining because it creates order for adding transactions (blocks) to the blockchain and creates a financial deterrent for malicious parties to add dishonest blocks (fake transactions). Miners receive a financial reward for adding the next block and the new block is chained on top of the previous block. Hence, blockchain.
Important to remember that all miners are nodes, but not all nodes are miners. Miners typically use specialized hardware known as ASICs in order to mine. ASICs are just specialized chips that really good at solving these difficult math problems.
Now onto masternodes and one of the most well known cryptocurrencies that implements masternodes (Dash Coin). Think of masternodes as the parents of nodes that provide an additional layer of security to the network, allow for unique features, govern the protocol, and provide additional financial incentive.
In order to become a masternode, you have to be a node but also stake a set amount of cryptocurrency. For Dash, this requirement is 1000 Dash tokens which roughly equates to $700K at today’s trading price. To think, at one point you could set up a masternode for $8K on the Dash network.
Dash Masternodes allow for unique features such as completely anonymous transactions (Dash Dark Send) and also instant payments. How they technically do this is inevitably some form of the dark arts and you can learn more about it here.
On top of that, Dash Masternodes give you the ability to vote in upcoming proposals for the network. I found this extremely interesting because in the bitcoin network, the decisions are supposedly controlled by the people, but in reality a small few at the top make the big decisions (cough cough Segwit2x) Check out the list of upcoming dash proposals that you can vote on here if you are a masternode. (I am in favor of the Dash sponsored cycling team. Seems like a good use of foundation proceeds). This is truly decentralized shit here. Controlling the fate of a cryptocurrency with complete strangers all around the world, all making decisions to lead to the most benefit for the Dash Foundation.
For staking your coins and becoming a masternode, you are also given a financial incentive. Direct from the Dash website:
“Dash Masternodes are like a savings account with a minimum deposit of 1,000 Dash. A traditional savings account pays interest, and a masternode pays rewards (in Dash coins) which are very much like interest. In the case of a masternode, the reward comes from performing services for the network. Not from lending.”
At the time of writing this, masternodes, are awarded 45% of the block reward which comes out to about 2 Dash per month. As more masternodes join the network, this reward decreases over time.
By implementing masternodes, you typically see the coin having less volatility (so only 20% swings instead of 50%. Nice.) The reason why is because holders are incentivized to stake them in order to become a masternode. Which means you can’t sell them, and if you do, you are no longer a masternode. Despite the large number of total Dash coins, there liquidity is low because of the lock up with masternodes. So buying large amount of coins is difficult, and typically you will see large run ups in price because the available supply is so limited.
We are starting to see more and more coins implement masternodes which i think is great. It creates economic incentive to run a node (where Bitcoin has none and as a result we’ve seen a dramatic decrease in the number of active nodes, which could ultimately lead to more centralization in the network).
You can check out a list of masternode coins here. It will show you the total “interest” you receive on staking your coins, total number of nodes, and what I really like, the amount of coins that are locked up due to masternodes staking coins. Some of these guys have 60%+ of their supply locked up. Time to get a Gunbot license and do auto trades using the step gain strategy (I'll save this for a future newsletter).
Now, I know it must be hard pulling your savings from your bank since you are earning a cool .01%, but maybe we should do a weekend project and set up a masternode pool. Anyone down?
Here are some of the masternode coins that I am diving deeper into:
- Dash
- Monetary Unit
- PIVX
- ION
- Innova