Masternode Blockchains for Beginners

7 Mins read

In our article Masternode Blockchains for Beginners, we want to explain with simple words which role masternodes play in a blockchain network.

1. The beginning of Masternodes

Bitcoin, Etherium, Dash, Monero, to name a few big ones, use different technologies to create and secure blocks in a blockchain network. I want to talk about the masternode technology with you.

The mother of the Masterndoes is Dash. The chain was born on January 19, 2014. Almost exactly two years later, the PIVX blockchain saw the light of day on January 30, 2016. PIVX is a fork of Dash both use masternodes in the network but, both use a different consensus algorithm: Dash relies on Proof-of-Work (PoW) and PIVX on Proof-of-Stake (PoS).

2. Two different consensus algorithm: PoW & PoS

Proof-of-Work (PoW)

Most people have heard of the “miners” of Bitcoin (BTC), but what do they do? Primarily, miners work in competition to solve complex mathematical calculations to create new blocks. 

Here the miners come in action. They use powerful processors to validate each block in the chain with sophisticated cryptographic functions and ensure that invalid transactions, such as duplicate output, are removed. Using the distributed consensus, all other miners and nodes in the network then “agree” that these transactions are valid. This process is called proof of work (PoW).

With PoW, security is achieved not only due to the complex nature of the cryptographic functions being processed but also by the relatively high cost that it takes in terms of energy.

Proof-of-Stake (PoS)

Proof-of-stake, or PoS, eliminates the miners and has “validators” instead. Validators using much less processing power to secure blocks, but literally “put” their money on the blocks they consider valid. A validator can generally be anyone willing to deposit coins in the network, and the algorithm determines which validators are selected for each block. While the miners want to increase their chances of solving the complex mathematical problem by putting more computing power on it, the validators increase their chances of being selected to validate a block by putting more coins on it. Should an attacker try to validate a bad block, the attacker will lose its stake and be barred from further validation privileges.

Lastly, this fixes the energy consumption issue present with PoW, as now there is no need for large numbers of powerful computers running 24/7.

One of the criticisms of PoS is that it still allows for a form of centralization. Basically, having more of an asset means you have more weight for validating, which earns you more rewards for staking, which means you now have even more weight, etc. Others have pointed out the “nothing-to-stake” problem, where validators could arguably stake funds across multiple different blockchain histories. Lastly, having too many validators still slows down the network, as it makes consensus take longer to reach relative to the number of validators. Fortunately, ways to address all these problems are being explored.

I don’t share this widespread opinion. On every continent, there are (or were) many huge mining farms that have mined Bitcoin. Again, the balance is shifting, so a single miner has much less chance of generating a new block.

Many people like PoW because they can immediately start mining with their existing hardware. At PoS, I need coins in advance to start mining. You must purchase them first on the exchange.

Masternode blockchains can have the PoW or the PoS consensus algorithm.

3. PoW or PoS – Mining or Validation

We learned in the previous section what proof-of-work and proof-of-stake mean. Both types are needed to create new blocks in the blockchain. If there are no miners in a PoW blockchain, the blockchain stops because no new block is created. The same for PoS. If there would be no user stake, the blockchain stuck. Usually, a blockchain can stand a maximum of 60 minutes without a new block. The blockchain is irreparably broken when the 60 minutes exceeded. This applies to both types.

To mine using PoW, you need a hardware miner. In the beginning, a high-quality graphics card was sufficient. But since the difficulty has increased to create new blocks, you need a powerful hardware miner to provide the necessary hash power.

PoW Miner
Left: A typical hardware miner. Right: A mining pool.

A typical hardware miner has a power consumption of 1.5 kW to 7 kW per hour. You can imagine how expensive it is to run even one of the 24 hours a day. When the unit needs such a high power output to calculate new blocks, you can imagine how warm it gets. At least two big high-performance fans must be installed to prevent the unit from overheating. A 3 room apartment can be comfortably heated in winter by only one unit. Because the fans rotate so fast and the devices produce a loud noise.

With PoS, the mining process is less complicated and consumes significantly less energy. You buy an appropriate amount of coins and send them to your wallet. Your wallet runs mostly in the background on your pc. A mini pc, like a RaspberryPI, is also very suitable for staking. The power consumption is only a few watts per hour.

4. Masternodes

Masternodes are full-nodes. They must have a permanent and stable Internet connection with a public IP address to access via the Internet by all other nodes in the network.

Masternodes provide the following functions in a blockchain network:

  • Enhance the privacy of transactions transmitted to the network
  • Perform instant transactions
  • Enable budgeting and treasury system
  • Participation in votes (Governance/DAO)
  • Maintaining network consensus

As you can see, master nodes are an extraordinary kind of node in the world of cryptocurrencies. Anyone can operate a Master Node for themselves. To run, you need security in a certain amount of coins, the collateral.

To place masternodes, you need a dedicated server and the appropriate amount of coins for the collateral. VPS (virtual private server) is a possible solution. VPS servers are nothing else than virtualized servers, which you can rent from a provider for 3€ per month. Another method is to use specialized masternode hosting providers. You don’t have to install anything yourself. The VPS server runs at the provider, and the configuration is very comfortable via a web frontend. However, installing a full node is also very easy, because proper projects have useful guides and installer scripts that do the work for you.

5. The Masternode ROI Magic

ROI stands for Return of Investment. How quickly will I get my investment back? Why is this question for so many people important? And the higher it is, the better the project, and I can make a quick buck.

Absolutely wrong. The exact opposite will happen.

In traditional investments, if you saw an ROI of 15% for the year, it was a great year. 10% was a win, and coming out even in a down market was just fine. Compounded over 30 years, and you would have a nice nest egg that would provide for you comfortably until the day you die.
That’s in the past. Nowadays you can be happy if you don’t have to pay interest on your bank balance. For interest rates > 2% per annum, you have to look. Some providers offer fixed-term deposits, which means that I have to invest my money for at least three years, better still five years, ten years, or longer.

Why would I invest in something that is only going to give me 10% a year when I can get 300% in a year? Because there is a 99.99% chance, you’ll never make it to 100%.

Always repeated, the same scheme

A team creates a masternode coin. They conduct a presale for first-time investors. The project lists on a stock exchange and various statistical sites.

With only a few nodes in the network, your ROI goes through the roof. External investors see this in the MNO and people get FOMO, which drives up the price of the coin.

Now we’re getting up steam. More investors are joining the action. They want to join in and make quick money. The first investors decide between selling a few coins to get their money back and setting up more masternodes. Most of them choose the latter, with dollar signs in their eyes.

The team is excited; they have created a profitable coin. Investors are excited because they are doubling their holdings every day. Money is being made all around, so more investors are coming on board.
When the team set up the coin, no one stopped to ask what the impact of all these new coins to be minted would be.

Photo by Imelda on Unsplash
Photo by Imelda on Unsplash

What happens? Hyperinflation!

Always repeated the same early investors sell their newly minted coins to avoid losses. The price drops. More investors sell to make sure they don’t go into the red.

The team doesn’t know what’s going on. The team justifies themselves to reassure everyone that it’s just a bump and that we’ll soon be making money again. It’s not gonna happen.

They have failed to mention how good it was for the project to put so many coins into circulation every day. Unless the use case or the benefit to the coin were merely fantastic, nothing would prevent this from being the beginning of the end for the coin.

The team is trying to save the coin. Someone smarter than them is pointing out her hyperinflation problem. They’re changing the reward structure to be more “sustainable.” But the damage is done. Supply is too high, and your demand has diminished.
Most teams abandon ship. We saw this every day in 2018/2019.

The prospect of enormous profits leads us to abandon our logic. Early investors make a lot of money. Later, investors think that they will do the same. But the truth is it’s too late for you. Your money’s already gone.
The project will die. The community will try to take over the project. But no one else knows how to code, how to run a project, and how much work goes into a crypto project. So it’s useless. You can still collect rewards at basement prices. Maybe you’ll get your money back someday.

Just because you’ve been after the high ROI…


There are good masternode projects out there. The ROI will decrease and reach typical values as more investors buy and set up master nodes. Don’t make the mistake of being the first.

These are the types of projects you want to find. Sustainable growth, vital purpose, a viable roadmap for the future, an enthusiastic team, a good community, a finished product, and not just on paper.

Ultimately, the new rule for Masternode investments is “wait and see.” Coins always fall off when they go public anyway. FOMO not into a coin because of the ROI. You are already late. Do not hunt. If we chase after dollar signs, we end up losing everything.

Don’t give up your logic. Don’t give in to easy money.

Scams, a flash in the pan, both continue to block the way for the mass introduction of the cryptocurrency.
Once again, we get in our way.

How do I make the right choice now?

Exactly this is why we have created the Stake and Nodes portal to provide a healthy overview. It’s complicated for a non-specialist to find your way around, and even people with some crypto experience have their problems. The Steak and Nodes team has been working in the masternode area for several years and knows the market and many projects well. The unique feature here is that we not take care about prices the comparison. But there are enough other websites which provide useful price statistics. Here you can see the quality and what successes the different masternode projects have already achieved. Furthermore, the portal offers exciting articles from the crypto area. For technology lovers, the category “Tech-Talk” is very interesting.

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