Masternode

Overview

A masternode is a computer permanently connected to the internet running a full blockchain node. Every masternode keeps a full copy of a blockchain in real time. Masternodes fulfill different functions in a coin’s transaction network, such as ensuring privacy of transactions, enabling instant transactions, or participating in governance. For the functions they perform, masternodes receive incentives or rewards.

Architecture

The structure of nodes, full nodes, and masternodes have different structures to one another.

Node, Full Node, Masternode

Node

In cryptocurrency, a node (networking) is represented by any computer that joins a blockchain network. The concept was first used by the Bitcoin network. The initial type of node used in the Bitcoin network was the lightweight node. A lightweight node downloads only the block headers to verify transactions, instead of the full blockchain. The mechanism of this type of node brings about a set of drawbacks, such as vulnerability of the validation process, privacy leaks, and security exposure.

Full Node

A full node differs from a lightweight one in that it downloads the entire blockchain and checks every block and transaction against the Bitcoin consensus rules. By doing so, full nodes help strengthen the coin’s economy, increase privacy, and enhance security. Full nodes also perform a number of other services, such as filtering transactions and blocks on behalf of lightweight nodes, transmitting new transactions from users to miners, broadcasting new blocks from miners to other nodes etc. Bitnodes were incentivized for a short period of time, until the end of 2015. Since then, the Bitcoin network has relied solely on volunteers willing to operate Bitnodes.

Masternode

A masternode is a full node that not only downloads the entire blockchain and keeps it updated in real time; it can also perform various operations inside a network; the fundamental ones are granting anonymous and instant transactions, as well as governance through voting.

A masternode requires a certain amount of coins, called a collateral, to be locked in a wallet, in order to function. This prerequisite for deploying a masternode is set to guarantee the commitment of the operator, and an accurate performance of the masternode. Moreover, the collateral helps protect the network from Sybil attacks, in which case multiple masternodes are created by an attacker, with the purpose of interfering with network operations. Collateral funds are not untouchable, they can be sold, spent, or moved; however, dismantling the collateral will result in turning the masternode inactive.

Masternodes receive rewards for all the services they provide.

Functions

Masternodes can fulfill various tasks inside a blockchain network. The three major functions they have is ensuring:

• privacy of the transactions
• security of the transactions
• a voting structure that upholds a governance system.

Privacy

Masternodes were created with the purpose of improving Bitcoin’s privacy system. Bitcoin uses pseudonymous privacy – transactions are public and linked to bitcoin addresses. Users’ privacy is guaranteed as long as the bitcoin addresses are not linked to their real identities.

The solution proposed by Dash (cryptocurrency), the first coin to introduce masternodes, was to render transactions completely anonymous, by introducing the PrivateSend function. This method was created starting from the CoinJoin idea. PrivateSend is a service that offers anonymity to the network users by imposing strict rules on the number of participants in a transaction, the amount transacted, and by running a process of coin mixing .

Each PrivateSend transaction requires at least three participants and uses common denominations (0.1, 1, 10, 100) to avoid revealing input/output increments. Once 3 or more users initiate a PrivateSend transaction, their input, output, and amount are broadcast to a randomly selected masternode, which mixes their transactions. In order to further obscure transaction trails, PrivateSend employs a chained approach where transactions pass through multiple masternodes for up to 8 mixing rounds.

Example of costs to deploy an attack against the DASH network

Security

Masternodes help protect blockchains from network attacks by applying the same logic used in the proof-of-stake algorithm – the one holding the stake is in control. Hence, this additional layer of security that masternodes bring to a network derives from the collateral required to deploy and operate a masternode. In order for someone to be able to launch any type of attack against the network, that could inflict serious damage, such as a Sybil attack, they need to control more than half of the masternodes in the network. This is also known as a majority attack, or a 51% attack. In a masternode secured network, the attacks are still possible, but they entail very high costs, in return for low returns.

Instant transactions

Instant transactions were introduced in cryptocurrency by DASH, through its InstantSend function.

For a transaction to be deemed as legitimate in a blockchain, it has to pass through a certain number of blocks – the widely accepted number is a minimum of 6 – in order to validate that it is genuine and not a fraudulent attempt. In masternode supporting blockchains, this validation task is transferred to masternodes. When an instant transaction is requested on the network, masternodes vote upon the validity of the transaction, and, if found genuine, secure all the details of the transaction and broadcast it to the network. This way, they ensure that the transaction will be included in all further mining actions. Since there is no need to wait for confirmations, the transaction is instant.

Governance

Any masternode in a blockchain network has the right to vote or propose changes to the network. Since running a masternode implies investment, both personal and financial, masternode operators are seen as most fit to make decisions on the future of the projects they invested in. Each project can implement its own scheme of answers in the case of a voting session.

This is a concept also introduced by DASH, when trying to solve two cryptocurrency: governance and funding. In the case of DASH, the masternodes have the ability to vote yes, no, or to abstain.

Rewards

To run a masternode, operators need to make both personal and financial investments. In order to motivate and support the creation of masternodes, a reward system is implemented in any masternode supporting network.

Masternodes get incentivized for the functions they perform in a network. The division of rewards between miners, masternodes, and the network, is established and implemented from the start of the project. The initial masternode integrator – DASH – implemented a mechanism that distributed the rewards by sending 45% to the miners, 45% to the masternode, and 10% to the network, a sum meant to help further funding of the project. This distribution remains up to each project that supports masternodes.

Masternodes receive rewards following a round-robin schedule. In this fashion, rewards decrease overtime, since the more masternodes are created, the more time passes before each gets its turn in receiving the reward.

Operating masternodes has been gaining a lot of popularity lately, since it is seen as an alternative investment vehicle, or a modern approach to earning passive income.

Tiered masternodes

Recent developments and interest in masternodes have determined an increase in the price of masternode supporting coins. Hence, deploying and operating a masternode has become a slight financial strain. To help with this and make it easier for everyone to invest in masternodes, some projects have implemented tiered masternodes. This solution implies different categories of masternodes, in different price ranges. Depending on the category or the tier it is situated in, a masternode gets assigned responsibilities and receives rewards accordingly.

Examples of projects that support tiered masternodes are: Divi, XDNA etc.

Technical challenges

Deploying and operating a masternode requires technological knowledge, an accurate understanding of the blockchain, launching and maintaining a server, masternode setup software, as well as financial efforts, that fluctuate depending on the project.

Resources needed for building a masternode are:

• A specific amount of coins, that differs from project to project
• A server or a VPS (Virtual Private Server) installed with Linux (most commonly, but Windows is also available)
• A dedicated IP address; this usually come with the VPS/server
• Storage space to save the blockchain

Masternode deployment platforms

Since launching and running a masternode proved to be a technologically demanding and puzzling process, not everyone had access to this type of investment. This problem has been addressed by creating masternode deployment platforms.

Masternode deployment platforms are online platforms that have automatised the process of deploying a masternode. They reduce the laborious set of procedures required to a mere GUI (Graphical User Interface), enabling anyone to deploy a masternode.

The first masternode deployment platform that appeared in the masternode sphere was the GIN platform, followed by others, such as Mano, Gentarium etc.

Economics

Ever since the implementation of the first masternodes by DASH in 2014, the number of masternode supporting coins has been on a constant upward trend. This trend has been more visible lately, since only between February-August 2018, the increase in masternode coins has been of 220%.

Increase in number of masternode supporting coins between February-August 2018

The total market capitalization of masternodes at the moment of writing has been estimated at roughly $2.1bn.

The total masternodes worth at the moment of writing has been estimated at roughly $1bn.

Masternodes and masternode supporting projects have unique indicators that show their evolution on the cryptocurrency market. The most particular ones are:

• ROI – return on investment
• Number of existing masternodes
• Change in reward percentage
• Masternode worth

Number of active DASH masternodes from the launch of the project until July 2018

Besides these, a masternode supporting coin can be monitored with the help of indicators that apply to all cryptocurrency projects. Some examples include: price, daily transacted volume, market cap etc.

Monitors

To centralize all the masternode supporting projects and simplify their monitoring, investors can make use of online monitors, that have appeared and are available to anyone. Examples of this type of service are MNO, MasterNodes.pro, Masternode Coins etc.

History

Creation

The first cryptocurrency to introduce masternodes was DASH. Launched in 2014, by Evan Duffield, the coin was initially titled XCoin, and then renamed DarkCoin. However, the name sparked some controversy regarding the coin’s link to illegal activities, since the project focused on the ability of making anonymous and untraceable transactions, so in March 2015 the coin was yet again rebranded as DASH. Initially modified from Litecoin, DASH was remade to be a fork of Bitcoin.

The innovation that DASH brought was its two-tiered network, consisting on two layers: one represented by the miners, and the second by the masternode network.

In 2017, Evan Duffield chose to step down from the position of CEO of Dash Core Project. The position was filled by Ryan Taylor, former Director of Finance. Duffield remains an advisor for the Dash team.

Forks

In cryptocurrency, a fork (blockchain) is the most common method to create a new coin or project. In the same way that DASH was a fork of Bitcoin, there are numerous projects that have started from modifying DASH’s core code.

Notable coins that have been created with the use of DASH core code are: PIVX, CrownCoin, Monoeci, Monetary Unit, Bulwark, GINcoin etc.

Adoption

Blockchain technology can be used in various areas. Its utility has been proven in domains such as banking, insurance, online voting, cloud services etc.

A number of blockchain-based companies have started to implement masternodes in their network, but only as auxiliary features. Their main goal is to support the utility of the blockchain, create valuable networks, and then offer the option of securing it with masternodes. Some examples of these networks are: decentralized marketplaces, decentralized cloud services, decentralized data management frameworks, security systems, tracing solutions etc.

Due to the abundance of masternode projects, this has also been seen as a method of discern honest projects from scams, since the honest ones deliver legitimate, useful products.

Criticism

Masternodes have received criticism exactly for their key differentiators, such as privacy and anonymity of transactions. DASH, for example, the initiator of the masternode network, and provider of the core code for numerous ulterior masternode supporting coins, has been blamed for falsely claiming that the transactions inside its blockchain are private. Its PrivateSend function (initially named DarkSend) has been said to be defectively adapted from the CoinJoin system. By diverting transactions through a masternode, the users risk placing their data through a process of de-anonymization, and by this making the network more vulnerable to Sybil attacks.

Moreover, the masternode method has been accused of being in direct disagreement with the cryptocurrency ideology, that of having a decentralized monetary system. Since it can be quite costly to own and operate a masternode, only few will be able to enter the masternode network, which translates into a centralization of power.

Since masternodes are regarded as an alternative form of investment, many have taken advantage of the hype surrounding them and launched masternode projects, only to embezzle the money that people put into these projects and then make themselves vanish without a trace.

Warren Buffett has been an avid critic of cryptocurrencies in general, going as far as calling Bitcoin “rat poison squared”.

Bill Gates has also expressed his skepticism about cryptocurrency, stating that Bitcoin is a “greater fool theory” type of investment.

References

This article "Masternode" is from Wikipedia. The list of its authors can be seen in its historical and/or the page Edithistory:Masternode. Articles copied from Draft Namespace on Wikipedia could be seen on the Draft Namespace of Wikipedia and not main one.

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