Many of you involved in the Cryptosphere or considering investing may have heard of the term Masternode and be wondering what a Masternode is?
In these articles I hope to open your eyes to the world of Masternodes, explain what they are, how they work and how to avoid the bad ones. None of these articles should be considered as investment advice however and you should always DYOR (do your own research).
What is a Masternode?
Before I explain what a Masternode is its worth spending a little time running through the different types of blockchain out there and which ones support running a Masternode.
Blockchains, in broad terms, break down into three types. POW (proof of work), POS (proof of stake) and a mixture of both.
Each of these blockchains must have a mechanism for processing transactions which allows the blockchain to function.
POW blockchains, such as Bitcoin, are underpinned by ‘miners’ who process transactions by ‘mining’ blocks which are then added to the blockchain. Without going into the technical detail in too much depth the mining of a block is achieved by the miners ‘rig’ (which is a computer specifically designed to process data at a very high rate) guessing the answer to a puzzle. The first mining rig to guess the answer to this puzzle correctly wins the right to mine the block. Once a block is mined the miner is also rewarded with, in this case, Bitcoin. Unfortunately POW systems are very energy intensive and the crypto industry is slowly moving over to an alternative, more energy efficient, type of blockchain called POS.
POS blockchains are underpinned by Masternodes. These are computers which process transactions on the blockchain and as a result are rewarded with coins from the blocks being created. Nodes sit on the blockchain, normally within a queuing system, and when they reach a certain position in this queue can be selected, at random, to be rewarded for participating within the network. As a result of this rewards can appear at different intervals but usually average out over time.
Why should I run a Masternode?
Masternodes provide the opportunity to invest in Cryptocurrencies with the added benefit of earning guaranteed extra coins in addition to gaining exposure to the large potential increases in value that can come within the Cryptosphere and owning cryptocurrencies.
These coins are awarded through running a node and as covered later in this article these rewards can also be used to generate rewards on top of your rewards. Great eh?
So, what can go wrong?
Well, as with any investment there are risks and these can be significant within the Masternode world. Since the beginning of 2018 there has been an explosion in the number of Masternode coins and unfortunately this has also attracted a fair number of scammers to this space.
Therefore this article comes with a word of warning. Be very cautious of any Masternode coin offering very high ROI percentages — anything in the 1,000% or above bracket really needs to be treated with caution and any coin that does not have a utility as well should be avoided in the early stages of it’s life. I will go into more detail of the steps I take to minimise the risk of choosing a scam coin and what to look out for in my next article.