Masternode hosting enables a person to engage with cryptocurrencies on a deeper level.

Masternode hosting enables a person to engage with cryptocurrencies on a deeper level. Users can play a pivotal role in the operations of a blockchain network, often earning passive income in return. However, this approach requires some technical knowledge and a large initial investment to get started.

While regular nodes in blockchain networks are primarily responsible for validating transactions, masternodes have additional responsibilities, such as enabling fast transactions and participating in network governance decisions. Horizon is a well-known project that uses masternodes.

This article explains what masternodes are and how they work, multiple ways to profit from running masternodes, the difference between masternodes and other passive income strategies in cryptocurrencies, and the risks associated with running masternodes.

What are masternodes and how do they work?

In a blockchain network, masternodes are specialized nodes that go beyond the basic functions of regular nodes. Let's understand how masternodes differ from their regular counterparts:

Regular nodes versus master nodes

Regular nodes are independent computers that relay and validate transactions while storing and maintaining a copy of the blockchain ledger. Unlike regular nodes, masternodes perform functions such as facilitating fast transactions, enhancing privacy, participating in governance decisions, and providing additional services such as decentralized storage or data verification.

What is the requirement to become a masternode

In order to become a masternode, the user needs to have a financial stake in the network by securing a certain amount of the network's cryptocurrency as collateral. For example, to run a Dash masternode, one needs to lock 1000 Dash (DASH).

Next, one needs to configure a dedicated computer within the blockchain network and synchronize it with the blockchain ledger. They need to ensure that it meets the minimum network requirements in terms of processing power, memory and storage.

Once the masternode is installed and configured, one needs to activate the masternode using the side transaction ID and output index. They monitor the performance of the masternode and ensure it stays online and in sync with the blockchain network.

Rewards for master nodes

In exchange for serving the network, masternode operators receive a percentage of the transaction fees collected by the network or block rewards generated by the blockchain. For masternode operators, this constant stream of incentives serves as a passive source of income, encouraging them to continue contributing to maintaining network security and smooth operations.

The rewards accumulated by masternodes depend on the total number of active masternodes in the network and the framework applied for reward distribution.

Multiple ways to earn masternode

Profiting through masternodes involves multiple methods, each related to the specific functions and services provided by masternodes within the blockchain network. Here are the different ways to make money using masternode:

Block rewards

Masternodes receive a portion of the block rewards generated by the network. This reward is typically shared between the miners (or stakeholders) and the masternode operators, incentivizing both to support the network.

Transfer fees

As masternodes process and validate transactions, they receive a share of the transaction fees collected by the network. This is a direct reward for their role in maintaining the efficiency and security of the blockchain.

Service fees

Some blockchain networks offer additional services, such as instant transactions or enhanced privacy features, through masternodes. Users can pay additional fees for these services, which are then distributed to the masternode operators that provide these functions.

Participation in governance

Masternode operators can vote on proposals and network updates in networks with decentralized governance. Projects may reward masternode operators for their participation in management, ensuring active participation in the decision-making process.

Survey rewards

In a few networks, masternodes may also participate in staking. By staking their collateral, masternode operators can receive rewards similar to traditional staking mechanisms, providing another layer of income. For example, Energi provides rewards for masternodes.

Run multiple masternodes

Operators with significant resources can set up and operate multiple masternodes across different networks or within the same network, doubling their profits. This requires a large initial investment and technical expertise, but can yield higher returns. The Horizen network allows masternode operators to increase their participation and revenue within the network.

The difference between masternode and other passive income strategies

When considering passive income strategies in the cryptocurrency space, masternodes are often compared to other popular methods such as staking, yield farming, and liquidity mining. Each strategy has its own unique benefits and risks, making it essential to understand their differences to make informed investment decisions.