Bitcoin and most altcoins are mined by a network of computers based on proof-of-work algorithms. This requires a significant investment in hardware and an above-average level of technical knowledge beyond the average user. Due to this and the significant energy, environmental impact, and scaling difficulty these miners are having, proof-of-stake coins are becoming more popular in which new coins are generated and distributed to existing coin holders based on the amount of coins they hold. In essence you are incentivized to simply hold coins. One class of proof-of-stake coins are called masternode coins, in which masternode holders provide the services of a full node as well as hold a certain, predetermined amount of coins.
What is a masternode?
A masternode is simply a cryptocurrency full node or computer wallet that keeps the full copy of the blockchain in real-time, just like your have Bitcoin full nodes and is always on and connected to the internet. But in addition to these standard node functions, masternodes can also perform the following functions with variations depending on the specific coin:
- Increasing privacy of transactions
- Doing instant transactions
- Participating in governance and voting on major decisions that affect the coin
- Enable budgeting and treasury system in cryptos
What is needed to run a masternode?
While anyone can start a masternode in most coins (NEO would be an exception), it does require some resources which provides barrier to entry. In order to run most masternodes you’ll need at least the following:
- A minimum amount of coins (e.g. 1,000 for DASH or 5,000 for BWK)
- a VPS or computer with a dedicated IP address to host a synced wallet that can be on and connected to the internet 24/7
- Another computer or device to store a remote/offline wallet; does not need to be on all the time
Each masternode is slightly different, but the general steps are:
- Download the coin's official wallet and transfer enough coins to it to establish a masternode. This is your local wallet. Then find the coin's masternode setup guide (usually on their website or their official github - BEWARE of unofficial sources)
- Create a new deposit address and deposit the exact amount of coins needed for the masternode. You can label the deposit address something like MN1 (or MN2, MN3, etc. depending on how many masternodes you have)
- Go to the debug console and get your masternode outputs and genkey.
- Sign up for an account with a virtual cloud server service like VULTR. This will be your VPS wallet that actually runs the masternode while your coins are kept in the local wallet.
- Deploy a new server (usually using Ubuntu and with the cheapest server size option) and label is something like BWK_MN_1 where BWK is the ticket symbol for the coin.
- Access the server you just deploy via the console (we suggest using PuTTY) and add the necessary scripts from the coin's setup guide.
- Modify the masternode.conf file in the coin folder on your computer with the IP address + port, private key, transaction hash, and transaction ID
- Close the wallet and reopen. Click on the masternodes tab, and then Start Alias for the masternode you want to start.
That all sound too complicated for you? Don't worry, you're not alone and there's a solution for you (explained below).
How to evaluate masternode coins as an investment
Would you buy the coin if it didn’t have masternodes?
This is the fundamental question to answer when thinking about which masternode coins in which to invest. You should evaluate the coin like any other coin you invest in and answer some basic questions:
- Is the coin useful? A lot of coins are being created that don’t really serve a purpose other than copying other coins with minor changes. Some coins are created for specific niches but aren’t really needed, like most of the marijuana themed coins...regular privacy coins would serve the marijuana industry just as good, if not better.
- What market is it addressing and does the current market cap of the coin make sense compared to the total potential market value associated with that market. For example, ripple is addressing a several trillion dollar industry, SWIFT payments and wire transfers, so a billion dollar market cap might seem big, but it’s not that large compared to the total market potential and there’s plenty of room left to grow.
- Does it have an engaged and active community and developer team? Check popular crypto forums like bitcointalk.org and reddit to see if people are talking about the coin and gauge general sentiment, and check github for developer activity. For example, if it’s been over a month since the last github commit and there are a lot of unresolved issues, then it means the dev team is not very active which is not a good sign for the long-term viability of the coin. A lot of masternode coins end up being scams and don't publish the real identities of the teams behind them.
- Look at the price chart for the coin. What has the price been doing for the last several months. Has there been a huge recent upswing in the price? If so, was it because of good news or a spike in volume with no accompanying news or developments to back it up. It’s generally not a good idea to buy after a large, quick runup in the price, especially if there was no news or significant change in the development of the coin. If there has been a recent dip, was it due to the overall market decreasing or some bad news specifically related to the coin? It is worthwhile to learn basic fundamental and technical analysis (chart reading) when it comes to analysing price and value.
What is the current ROI of a masternode?
Sites like masternodes.pro and masternodes.online can help you quickly evaluate the ROI of many masternode coins. ROI is generally denominated using the coin as the basis, so if you need 1,000 coins to get a masternode, and you receive 500 coins in masternode rewards over the course of a year, your ROI would be 50%. Meanwhile, the price of the coin could have gone from $200 to $500, so your USD denominated return would be much higher than 50%. But that could work the opposite way as well.
Also, the ROI you see listed on the sites may not be 100% accurate and they represent past performance, so they don’t guarantee that the ROI will stay the same. Once you narrow down your search, you should dig a little deeper to see what the current masternode share of the block reward is and the current cost of a masternode, take the former and divide by the latter to get the current ROI for each payout period. Different coins pay out at different intervals, some daily, some less frequently. Furthermore, many coins have rewards that reduce over time and rewards will reduce naturally as more and more people set up masternodes, so the rewards get split among more and more people. However, as more people set up masternodes, it removes coins from the circulating supply, which should drive up prices, all else being equal.
How to invest
Once you’ve determined which masternodes you want to invest in, there are two ways you can go about it. Do it yourself or use a hosting service. If you do it yourself, it will require the resources needed above. This option also includes the possibility of going in on a masternode with a few people you know so you can split the costs assuming at least one of you has the technical knowledge to set one up. This is the preferred method.
However, say you don’t have any friends that are interested in masternodes and you don’t have the capital, knowledge, or time needed to set one up yourself. If you have the capital but not the time or knowledge, you can use a hosting service where you send them the coins and they will handle the rest. This obviously requires a great deal of trust on your part. If you don’t have the capital to get a whole masternode, you can use a shared masternode service.
Shared Masternode Services
There are a few shared masternode services that exist currently and more popping up as awareness about masternodes spreads. These services provide a turnkey solution to investing in masternodes at a fraction of the cost of doing it yourself. This is by far the easiest way to invest in masternodes. You can simply buy a share or shares in a masternode (with each share usually representing a 1% stake in the masternode). If you want to leave the masternode, you can usually sell your shares to another investor without the hosting service having to shut down the whole masternode. The main things to consider when selecting a shared service are fees and reputation as the service provider will have control of your coins and could run off with them. Even if a service has been established for several years, the safety of your coins still isn’t guaranteed.
CLICK HERE to join the BlacKrypto Society shared masternode service.
As always, this does not constitute investment advice and do your own research before buying any coins.