WHAT ARE MASTERNODES – UNDERSTANDING MASTERNODES
Masternodes verify transactions and maintain a vast ledger of all public transactions for a particular cryptocurrency. They provide transparency and security and run the software that implements the rules and functionality of a cryptocurrency. The management and governance of the protocol’s blockchain is also the responsibility of its masternodes.
A masternode is inexpensive to operate (just the server costs) but can require a significant financial investment in the form of the currency needed to “stake” the masternode. Operators are rewarded with cryptocurrency earnings as an incentive to stake and maintain their masternodes.
Let’s use Energi (NRG), a masternode coin, as an example to outline the process.
Launching an Energi masternode will need 1,000 NRG in the official Energi Wallet to act as collateral.
Once you have your collateral in your wallet, you will need to install the Energi masternode software on a server connected to the internet and operate it 24/7.
At this point, you stake your 1,000 NRG on the Energi blockchain and start your masternode. Once the new masternode is broadcasted to the network, your new Energi masternode will begin to process transactions, and as the operator, you will start to receive rewards.
Suppose you want to avoid the heavy lifting and technical expertise needed to update masternode software and keep your masternodes online. In that case, some companies host and maintain masternodes like Nodehub.io (which I use) that handle it for you.
WHAT IS POW?
Let’s use Bitcoin as an example.
Miners are the people who perform “proof-of-work” to bring blocks on the blockchain to life. Each time a miner submits a winning “proof-of-work,” the network accepts a new block.
It isn’t easy to find the winning proof of work. This difficulty is why expensive, specialized computers (ASICs) are the best way to supply the work required to win Bitcoin. If these high-powered specialized computers can guess the matching computation, miners will collect the reward.
WHAT IS POS?
“Proof-of-Stake” is a consensus mechanism that also validates cryptocurrency transactions based on coin ownership. This “ownership” requirement to process transactions is also referred to as “staking” coins. When “staked,” your coins are locked and cannot be traded; you can validate transactions and collect rewards.
This is an alternative to proof-of-work, which was the first consensus mechanism for cryptocurrency. Because proof of stake is more energy-efficient than proof of work, it has become more popular as people focus on how crypto mining impacts the planet.
PROS AND CONS
What are the “pros” and “cons” of operating a cryptocurrency masternode?
Operating a cryptocurrency masternode is a relatively simple way to make money.
Basically, you can launch a masternode with a masternode provider (or configure a server yourself), stake your coins, and start operating.
It is a “low touch” source of residual income.
Once you set everything up, it is very easy to automate. Your masternode runs 24/7 with very little involvement if set up correctly or using a masternode provider.
The masternode cost for some coins is very inexpensive.
You can start some coin masternodes for as little as $10.00 and masternode hosting costs for as little as 99 cents per month.
Masternodes are a tangible way of getting involved with cryptocurrency.
Masternodes are the infrastructure on which the masternode coin blockchain runs. Without masternodes, there would be no transaction confirmations, and the value of the currency would drop to zero overnight without buyers and sellers.
Cryptocurrency is considered an asset for US Tax Purposes.
You pay income tax on the profits at the regular income rate, but when you sell cryptocurrency, you only pay the capital gains rate on the profit difference between acquisition costs and the sale price (please check with your accountant).
Some masternode coins are of dubious quality and are thinly traded.
If you do not use a masternode provider like Nodehub.io, configuring a masternode can be a very complex process. Additionally, you will need to keep up with blockchain upgrades for your node.
Cryptocurrency prices are very volatile. These wild swings can make operating a masternode profitable one day and unprofitable the next. Also, the money accruing in your wallet can rapidly decrease in value before you can exchange it into dollars, making previous masternode operations not profitable.
You can lose money
Ultimately, like any business, you can lose money. Research the coins you want to support to ensure they have a viable future.
The Levered Income “Lever Rank” rates a tool or business model on how much it levers your time and effort into generating you income. Working at a job is ranked at a “1” (1 hour of work generates 1 hour of pay), and someone that just gives you free money (I wish I knew someone like this) is ranked at a “100”.
Operating a cryptocurrency masternode has a Lever Rank of 40, due primarily to the extreme fluctuations in cryptocurrency value and coin quality.
Going through our shortlist of questions that we try to answer when evaluating a business:
Is there a market for this business?
There is definitely a market for cryptocurrencies. I see cryptocurrencies ultimately disrupting the way money is used now. Money is already making the slow journey to the digital realm (think credit cards, online brokerages, currency trading).
How much risk is associated with this business?
I look at cryptocurrency masternode risk in 2 different ways.
From an operational standpoint, you do not need employees so there is no chance of litigation from employee issues or a customer getting hurt in your place of business. More importantly, the customer cannot get hurt using your product since you are in effect using your cryptocurrency masternodes to “print money”. The IRS has published guidelines for tax reporting on cryptocurrencies so we have clear (relatively speaking, as the IRS is never clear) guidance on complying with tax laws.
From a stability standpoint, there are tremendous risks in cryptocurrency in general. Such an innovative and new way of conceptualizing money leads to speculation, wild swings in value, and a lot of scams. Your operation can go from profitability to losses in the very short term. Masternode coins tend to be be low-quality coins.
How long in the future is the business expected to pay residual income to the business owner?
A masternode is the backbone of a specific currency. Without masternodes validating blocks on the blockchain, there are no transactions and no cryptocurrency. If managed correctly, this business can exist as long as that cryptocurrency exists.
Is the amount of residual income fixed or does it grow over time?
The amount of residual income generated by cryptocurrency masternodes is not fixed and can fluctuate with coin valuation. As cryptocurrencies are adopted more and more as a unit of commerce, there will be more demand for masternodes to validate and secure an ever-increasing number of transactions.
How much investment is needed to start up the business?
This can vary tremendously based on how you want to scale the operations.
You can currently start a masternode and secure managed masternode hosting for less than $50.00 and start making money right away.
How much money is needed to run the business?
This business does not require a large reserve, in that you can shut down masternodes when operating is unprofitable and then restart them when profitable again. It is a completely virtual business.
How much time and effort is needed to start up the business?
Very little if using a masternode provider that sets it up for you. there is no reason to go through the arduous process of learning how to set up a masternode for different coins when node providers do it for you.
How much time and effort is needed to run the business?
I look at my masternodes about once a week for 5 minutes.
Can this business lead to other symbiotic or support businesses in the future?
You can create node monitoring applications, start affiliate programs, and coach people in getting started.
Is learning this business model helpful to starting other businesses?
Yes, I believe learning about cryptocurrency masternodes has given me a better understanding of cryptocurrencies in general. I do believe that peer-to-peer transactions that bypass government and banking control are the future.
What are masternodes?
Masternodes are a combination of PoW and PoS. Masternodes are an alternative to mining cryptocurrency and, like mining, also utilize computing power to generate a residual income in cryptocurrency (although a LOT less).
Used correctly, masternodes can add another levered, residual income stream to your toolbox.