To understand the concept of Masternode, we should have the knowledge of cryptocurrency nodes.
What are cryptocurrency nodes?
In order for cryptocurrencies to function the data must be relayed through nodes. These information centers pass the data through the network, and this network is what allows the encryption assets to be decentralized.
Hosting a cryptocurrency network on a centralized provider would mean that it would be at risk of being shut down at any time by a provider or a world government. However, using the node system that duty is distributed all over the world in a peer to peer fashion preventing this from happening.
The nodes store the blockchain and all of its data so that it can be retrieved by other people such as users and miners.
What is a Masternode?
The masternode is the kind of node for a Proof of Stake cryptocurrencies. Unlike other nodes, in most cases, you will get a block reward for hosting a masternode. These nodes pull double duty and not only process the blockchain’s information, but they also perform the task of verifying transactions like miners do for proof of work cryptocurrencies.
A masternode is cheaper to run than a mining operation, and it’s also much easier to set up, making it an attractive option for people who’d like to own a node but don’t have much technical knowledge.
How does crypto masternode work?
A cryptocurrency masternode functions based on collateral or your stake in the network. Each project will have a quantity of coins that you must block to create a masternode. This number varies greatly between projects. Sometimes it’s 1,000 but in other cases, it might be 10,000.
So, while the costs to actually run the node are low, the cost for the coins to create it may actually be quite high depending on how popular the currency is.
In order to run a masternode you’ll likely need to set it up on a VPS in order to have enough resources for it to run. Once it’s up and running there’s not much else for you to do though. Your node verifies transactions and you’re paid a fee for hosting it.
Masternodes pros and cons
There are many benefits to setting up a masternode. For starters, you can earn cryptocurrencies without investing in expensive mining equipment. They’re also much more energy efficient to run, and hosting them on a VPS is cheap. The learning curve is also pretty easy to conquer and you won’t need much else in the way of specialized knowledge to run one.
The cons of a masternode set up are that you’ll need a good deal of coins to get started, and in some cases that can be a large expense. Some masternode coins also have difficulty maintaining value due to the constant influx of easily obtainable coins. In addition, if the difficulty increases in the network, you can reduce your profit potential.