What Are Masternodes? Passive Income in Crypto

Conor Maloney

January 26, 2018


Image via steemit

When people think about making money in the crypto-sphere, they’re often thinking about day trading. The high-risk nature of day trading with crypto has led many to refer newcomers to the Reddit Guide on Crypto Day Trading – discouraging to some, not all.

Getting in early on the right altcoin and watching their investment skyrocket is the dream of many crypto enthusiasts, but there are many other ways to earn an income in the space. Coin mining, staking, long-term investment holding – all of these can be lucrative to the enterprising user.

Another way of earning money is by investing in masternodes, a server on a decentralized network. Hosting one of these nodes can offer an excellent way of earning passive income, meaning that after the initial investment, there’s little to no maintenance, and the masternode does the work and ideally earns the money for you. The potential earnings tend to be higher with newer currencies, as users are rewarded small coin amounts for locking up a small amount of cryptocurrency and offering critical services to the network such as governance functions.
Have I lost you yet? Don’t worry. Let’s take a closer look at exactly what masternodes are, how they generate the income, and potential downsides as well.

What exactly is a Masternode?

A masternode is simply a server hosted on a decentralized cryptocurrency network.

Masternodes have features that allow instant and anonymous transactions, carrying out certain transactions in ways a typical node cannot. To operate a masternode, one is required to lock up what is usually a large amount of coins and host a server through which the locked up coins generate income.

A virtual private server (VPS) is the most common solution for hosting a masternode, though it can also operate through a desktop computer, a laptop, or even a Raspberry Pi. When a user hosts a masternode, they become part of the network’s infrastructure. They offer critical services to the network in exchange for regular (daily or monthly) payouts.

Many think that masternodes are extensions of proof-of-stake (PoS) coins, which are not mined, but this isn’t necessarily the case – some proof-of-work (PoW) systems also use masternodes. The reason for the misconception is that operating a masternode works in a PoS-like fashion: users generate passive income by holding their coins, just the way stakers make money in PoS systems.

Not many currencies offer the option of masternode hosting – there just isn’t really any incentive for them to do so. Dash is one of the top currencies that support masternodes at the moment, and perhaps others will follow suit. Privacy and anonymity are crucial prerequisites in offering masternode services, and Dash has quite a strong reputation in this regard. The currency has been supporting the masternode business model for a while now.

How Much Income can Masternodes Generate?

It depends. Let’s say you want to host a Dash masternode, for example. You need to have 1000 Dash collateral to start off with – at the time of writing, 1 Dash is worth almost $782 USD, so this is definitely the hard part! You need a dedicated IP address to run the masternode 24 hours a day with almost no interruption to the connection, and the electricity costs of running a node can also be very high indeed (thanks to Toby for pointing that out in the comments!),

For Dash, the initial investment is obviously quite massive (roughly $782,000) and Dash reports that typically the reward is about 2 Dash per week per masternode. Let’s say you did have the money to set up a Dash masternode – after your investment, you’d probably earn 0.23 Dash per day or 6.86 Dash per month, an equivalent of about $166 per day or $5,100 per month. This translates to a return of 8% per annum, which is a pretty attractive ROI, and while the value of Dash can’t be guaranteed, it’s a pretty sure thing that you’ll keep earning 2 Dash per week.

So, in this case, very expensive to start off with – however, hosting a masternode for a newer currency could prove quite lucrative. Other currencies that support masternodes include PIVX, Block, Crown, Bata, Diamond, Neutron, Vcash, Xtrabytes, and ChainCoin, and most of these currencies are not widely known.

Advantages and Disadvantages

Generally, hosting a masternode offers a lower than expected return on investment (ROI). It’s not a good route for people looking for that “get rich quick” solution to all their problems. Slow to earn, and potentially expensive to start off with, hosting masternodes comes with some clear downsides. There’s even the risk, as always, that the currency you’re hosting for could collapse, leaving you in quite a tough spot.

Another thing to consider is that setting up a masternode can be a sophisticated process for many people. It’s not as complicated as mining, but it can be a daunting task for people without extensive tech knowledge.

So it’s not a case of “easy money” (what a surprise!). There are disadvantages, as with anything.

What about the advantages?

Well, passive income can be a great way to make money in the background, freeing up your time for other business ventures. Typically, depending on the coin selected, masternode operators earn a return of 5-20% on their investment. Some people use this ROI to invest in more masternodes, building their own little masternode empire.

Remember, you don’t need over half a million dollars for all of these nodes – if you find a coin that allows hosting and start when it’s worth less than a dollar, who knows. Your investment could increase in value while your node brings in steady, predictable income, and all you have to do is maintain the connection. While some coins will generate more income than others, users still earn passive income without much effort.

On the whole, masternodes could shape the future of the crypto economy. They offer an exciting way of generating passive income without significant effort, and if the value of cryptocurrencies in the future is worth more than it is today, operating masternodes could ultimately be a profitable venture for masternode operators who choose the right coin at the right time. That’s what it’s all about.

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6 thoughts on “What Are Masternodes? Passive Income in Crypto

  1. Hello Nathan. Thank you for the comment and compliments! Conor is a true advocate of blockchain! Keep checking out our site and share with your friends. Cheers!

  2. Another concern you may want to add is the cost associated with running a node, especially one that has high availability and uptime.

  3. That’s a great point Toby. Thanks for pointing it out. Server costs can get pricey and has to be included in calculations on roi

  4. Thanks Toby! You’re absolutely right, I’ve included that and credited you for bringing it up in the article, very good point.

  5. Thanks for the comment! It’s exciting to see that basic users can get into the masternode game without the technical know how or the money to maintain a VPS.

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