1. How Does a Masternode Works
Much like proof of stake, masternodes rely on staking a certain amount of a given currency within the currency’s network. To establish a masternode, you’d first need to buy a substantial amount of the currency in question. A StrongHands Masternode, for example, requires 1,000 SHMN.
So it is time to stake and earn your cash back. You’d start by downloading your currency’s core wallet and use it to create a masternode. After you set up your computer as a server, the core wallet integrates your computer as one of many nodes that supports the blockchain. Operators can also contract a third party to run the server for them.
Once a masternode is live, it accommodates an unique series of functions, such as instant and/or anonymous payments. They also enable a decentralized governance system that allows node operators to vote on important developments within the blockchain. As compensation for their troubles, SHMN masternodes typically share an equally 70% of block rewards with the blockchain’s miners. The other 30% goes to the blockchain’s treasury fund, and operators are in charge of voting on proposals for how these funds will be allocated to improve the network.
It’s important to note that simply holding the requisite amount of currency for a masternode is not enough to run one. Each currency has its own guidelines for maintaining a masternode, and if these conditions aren’t met or the currency is moved from its staking position, a masternode will cease operating.
Masternodes protect block chains from network attacks in the same vein as traditional proof of stake algorithms. As with Dash, it’s often expensive to accumulated enough of a currency to create a masternode. This expense helps keep the network decentralized, as it would take an ungodly amount of money to purchase enough currency to have a monopoly on its nodes. Your average and even above average investor isn’t rich enough for this, because we’re not all Bill Gates.
The cost of operation also keeps operators honest. Unlike Bitcoin miners who may switch from one coin on its blockchain to the next based on profitability, operators are incentivised to properly maintain their masternodes. The exorbitant initial investment serves as collateral, whereby if operators want their investment to pay off, they have to play by the blockchain’s rules. Between the high operation costs and promising return on investment, it’s in an operator’s best interest to operate his/her node properly and without any malicious intent.
2. Masternode Pioneers: The Coins and their Uses
Dash originally developed the masternode to implement the following services and SHMN was created based on these technologies:
- InstaSend: Masternodes accommodate nearly instantaneous transactions
- PrivateSend: Masternodes allow for users to make and receive anonymous payments
- Decentralized Governance: Masternodes adjudicate and vote on technological and financial developments for the blockchain
As more coins entered the cryptosphere, some developers took bits and pieces Dash’s model for their own crytpocurrencies, and some applied them to new and intuitive use cases.
Privacy coins have sought to improve the precedent for transaction anonymity that Dash has set. One such coin, PIVX, began as a fork of DASH but is now making crypto even more incognito than its parent currency.
PIVX utilizes its own custom version of the Zerocoin protocol, the same protocol used by other privacy coins such as Zcoin. With PIVX, users can choose to convert their standard PIVX coins for zPIV tokens. Sending zPIV tokens ensures that user identity is completely dissociated from the transaction ID, enabling a completely anonymous yet verifiable asset transfer through PIVX masternodes.
SHMN also incorporated PIVX's Zerocoin Protocol making a great combination to guarantee all transaction anonimous if the user decides, just flagging it in the GUI Wallet before sending currency.
4. The Use Case
Masternode application is quite flexible. It compensates for proof of work’s limitations and behaves almost like a buffed-up version proof of stake systems.
Like proof of stake, it avoids the de-facto centralization mining pools bring to proof of work networks, and it consumes less energy than the proof of work model. Masternodes may promise enhanced stability and network loyalty, as larger dividends and high initial investment costs make it less likely that operators will abandon their position in the network.
They can even be used to keep miners from stepping out of line. Under Dash’s model, masternodes on the second tier network monitor the first tier proof of work network. This gives masternodes full reign to reject or orphan blocks if their miner uses and outdated version of Dash or tries to manipulate block rewards.
While their lasting application is still speculative, masternodes have serious potential to expedite distributive consensus and further democratize decision making within blockchain communities. If you can muster the capital, they’re certainly a promising investment opportunity, as their approach to consensus and network monitoring offer a middle-of-the-road solution to the problems facing both proof of work and proof of stake models.