Masternodes are a common topic in cryptocurrency, but if you’re not familiar with them they seem a bit unusual. So, let’s dive in and look at what they are, why they exist and how they work.
What is a masternode?
A masternode is akin to a server on a decentralized network. They are a step above regular nodes and perform network functions or services that regular nodes can’t.
To have a masternode one must stake a large amount of tokens. This is to prove they are a dedicated user of the network.
People want to have masternodes because it gives them exclusive rights and financial rewards. They aren’t easy to set up though. You have to have a big token holding and you’ll need some technical computer access, such as a server hosting a wallet 24/7 with a dedicated IP address and plenty of storage space.
What can masternodes do?
Not all networks have masternodes and every network is different. They all have a different hierarchy structure with varying powers and rewards available.
On a basic level masternodes contribute to the network upkeep, which means they are keeping copies of the blockchain and perhaps contributing to transaction processing.
One of the most common abilities of a masternode is voting. In this case if you are the owner of a masternode, you will have a vote on network operations. This makes sense from an economics standpoint because people have money on the line.
Masternodes have a lot of money invested in the network, which means they are incentivized to vote in what they believe is the best interest of the network. If masternodes collude and run a network into the ground with poor decisions, they would end up losing a lot of money as their staked cryptocurrency would drop in price. Additionally, bad actors can lose their stake and be left with nothing.
Why do people run them?
Perhaps masternodes will claim that they are running them because they are a big supporter of the network and they want to see it grow and flourish. They might even be telling the truth.
But… the biggest reason people run them is profit. Masternodes require computational power, which takes up time and money. In return, they have an exclusive status and will receive payment.
Essentially, masternodes can provide big token holders the opportunity to lock up their tokens and start to earn a passive income alongside their existing holding, which they could get back at any time.