What is a Masternode?

Do masternodes herald the spring?

Posted on May 21, 2019

There is a lot of talk about Masternodes at the moment, and we think there's going to be a lot more over the next couple of years. Given that, we thought that this would be a good opportunity to provide a brief, not too technical overview about what a Masternode actually is and explain the opportunity that they represent.

One of the best ways to grasp the concept of Masternodes is to explain a bit about the development of the crypto sector's infrastructure.

Crypto transactions are verified by a global network of processing nodes. These nodes compete to validate a block of information and a micro amount, usually in tokens, is paid to the winning node. The more validations a node provides, the higher the returns its owners enjoy. The validated information block, meanwhile, is added to the chain and stored on the virtual ledgers that underpin crypto currencies.

Nodes: Inconsistent and no reward for loyalty

As the potential of the technology behind crypto currencies became more widely understood, it was realised that these ledgers, which have come to be known as blockchains, could be used to validate all manner of information. This has led to a blooming of projects across the crypto sector that are being used to validate information from car or art ownership to educational achievements to supply chain information and the provenance of food.

Success has also made its shortcomings apparent however: its reliance on the global network of processing nodes means that blockchains demand a steady stream of availability and processing power. Without this, the information that's being added cannot be validated, which runs a risk of undermining all the information that is on the chain.

And because the individual nodes do not have an interest in protecting the value of the information on the blockchain, they can come and go without penalty.

Masternodes: stable, consistent and rewarding

The Masternode approach was pioneered in 2014 and has rapidly gained popularity. Key to their success is the fact that rather than being nomadic, Masternodes are committed to the specific crypto project that they support.

Rather than taking a mercenary approach to the information that they validate, Masternode operators take a stake in the projects that they support, generally in the form of a tranche of tokens. This means that a Masternode's success is tied to the success of the tokens that are associated with the project that they are supporting.

Masternodes are doubly rewarded for pledging their commitment to a project: On the one hand, like traditional data miners they receive tokens in return for the information that they validate. The more validation work the Masternode completes, the more tokens the owner can enjoy.

At the same time, if the project is a success, demand for the project's tokens will rise, and as the demand rises, so does their value. Technology and economics are therefore closely intertwined.

Another benefit of the Masternode approach is that it is generally far less power-hungry than traditional processing nodes. This may not be a primary concern in an economically driven business environment, but it is welcome news given some of the challenges we face in generating enough power to support the crypto sector.

In the next article, we will discuss how INDX will support the development of the Masternode sector, helping spread best practice among specialists and bringing new opportunities to investors.

INDX is making it simple to invest in the masternode sector. We want to ensure that everyone can benefit from the digital economy by reducing uncertainty, risk, energy consumption and wasted time.
Image caption