An introduction to the topic is essential for new users, but even experienced users often look for instructions on masternodes. While the first group is only just getting in touch with the subject and has fundamental questions about the topic, the second group often seeks advice on setting up their masternode.
At the same time, masternodes are always a difficult topic when it comes to serious processing. Because especially with crypto currencies that use this technology, there are many scams. And even if it is not fraud in the criminal sense, many projects carry a high risk. In many cases even higher than with other cryptocurrencies. As is well known, these are highly volatile anyway and carry a very high risk of total loss of the invested capital.
So our guide tries to build a bridge. The first part is dedicated to anyone who is looking for a concise explanation of what a masternode is and how it works. The second part would like to give the readers insights and a checklist to help them to protect themselves from dubious projects, some of which already have criminal traits.
What is a masternode?
A masternode is a network node that performs special tasks within the respective network. The operator is rewarded for operating the masternode and completing these tasks. A server is required to operate the masternode; a relatively small VPS is usually sufficient. In addition, you need a certain amount of the respective crypto currency and have to keep this deposit on a public key permanently so that the server is qualified as a masternode.
Therefore, the ownership of a deposit – mostly acquired through purchase, in some cases acquired through mining – is always associated with its operation. Often, the reward that the operator receives is viewed in the context of the contribution made. Therefore, the term “ROI” is often used, which means “return on investment”.
Similar to the classic interest rate, a percentage is determined that indicates how much money the operator receives per year. This value can also be determined per day, week or month and sometimes fluctuates extremely. These fluctuations are due, on the one hand, to the fact that the respective cryptocurrency is subject to fluctuations against Bitcoin and the US dollar, provided that it can be traded directly against dollars or euros at all. In addition, the part of the block award intended for the operators of masternodes will change for some crypto currencies. In many cases, this is increasingly reduced or is dependent on the contribution made being increased higher (tiered masternode).
Most serious projects have a sentence that stays stable for a long time, but does not generate huge sums of money.
The above explanations are basically correct, but it is worth taking a closer look to understand exactly how a masternode works.
As already mentioned, masternodes perform some special tasks. This can include:
- Perform anonymous transactions
- Perform instant transactions
- Exercise voting rights in the network
- Monitor the network yourself (example Hypernodes)
As you can see from these examples, masternode technology must be distinguished from “proof of stake”. A deposit must also be held here, but it is not primarily about verifying transactions. In fact, “Proof of Work” and masternodes are not mutually exclusive. It is often the case that miners and masternode operators share the block reward in a certain ratio.
In addition to special tasks, a masternode also handles general ones. These are the same tasks that normal network nodes perform. This primarily includes the distribution, storage and dissemination of the network itself. The miners verify the transactions, the nodes distribute them over the network.
Without sufficient distribution through different nodes – preferably as many as possible – the decentralized character of the network is lost. All cryptocurrencies that do not use masternode technology are ultimately based on the voluntary use of the operator. For example, you can operate a Bitcoin Full Node, but there is no reward for operating it, its use is purely voluntary.
Der Virtual Private Server
A VPS is a small, virtual server that you usually rent from a provider. The actual masternode is operated on it. Renting makes sense because, for example, you need a static IP to operate the masternode. From a technical point of view, the VPS is therefore the vital component if you want to operate a masternode yourself.
Most of the problems beginners have are related to the VPS and often concern the following points:
- Choice of provider / scope of services
- Choice and configuration of the operating system for the VPS
- Configuration of the masternode on the VPS
- Updates of the operating system and masternode
As far as the first point is concerned, many beginners choose too low a performance for their VPS. The reason for this is easy to see, it should be saved. However, if you have too little computing power, memory or bandwidth, the masternode cannot work properly.
We recommend packages that offer the following:
- 2 CPU Core
- 2 GB RAM
- 3 TB bandwidth
- Min 40 GB SSD (more if the network is older)
When it comes to the choice of the operating system, opinions differ. Linux is generally recommended because it is the best system for running servers. Which distribution is a matter of personal taste. Linux is also available free of charge.
But it can be problematic if you have no idea about Linux. Because in addition to the configuration at the start of the node, updates must also be installed at some point.
Windows Server is of course also possible and appeals to many beginners because the environment is more familiar. The first masternode is a great reason to finally get involved with Linux. Because Windows is not only more expensive, but many instructions for masternodes are written for Linux.
The master node is configured at two ends, once on the VPS and once in a configuration file for the wallet. It should be noted that the masternode and wallet must always be operated separately. Beginners fail at this point because the respective instructions in the communities do not always explain everything. Sometimes the authors take intermediate steps for granted.
Masternode Coin sees the light of day
Let us assume that you became aware of a very young project through a relevant forum or one of the many websites dealing with masternodes. The marketing of the project promises great features. This cryptocurrency will change everything. Because “ExampleCoin” will be successful through:
- An own marketplace (of course, eBay, Amazon and even OpenBazar are obsolete)
- Fast block time (nobody else has)
- Extremely high ROI (10000% pa)
- Own DEX in 2022 (BOAH!)
- A premine
As you can see in the notes in brackets, as an author, you cannot write an article on the subject without a touch of sarcasm. But let’s be serious again: You will find the features mentioned above in hundreds of projects.
Probably the most important promise that an extremely large number of projects make is the immense ROI. Some cryptocurrencies are listed on the relevant pages, with over 90,000% pa. We will come to the fallacy that this will get you rich quickly later.
Giving is more blessed than receiving
Since ExampleCoin only has a meager forum entry and a website that is not yet complete, you decide to contact the community. Preferably via Discord, because here you get direct contact with the developer.
You quickly find out that SampleCoin is still not being traded anywhere. In addition, the project is still in a phase in which you can get the coin via PoW mining. At a later point in time or at the level of a certain block, the masternode functionality of ExampleCoin is then activated.
You don’t have a rig to mine with and there is no exchange that offers sample coin. It’s a dilemma. The market has an effective solution for this. Most exchanges charge a so-called “listing fee”, a fee for a cryptocurrency to be listed on the exchange.
The fee for “BrückenDEX” – a fictitious, decentralized exchange – is 5 Bitcoin. The DEX is fictitious, the fee is quite common and rather low. Because it can be much higher for larger exchanges. The “BrückenDEX” exchange is not only decentralized, it is also cheap and, in addition to sample coins, it carries more than 200 other masternode coins. These were all noted in the same way. You paid for it.
But where do the 5 BTC come from? The developer doesn’t have them, but he has a premine.
Now you come back into play. To get the 5 bitcoin, the developer will hold an auction on the Discord community channel. Only three contingents of sample coin will be auctioned from the premine, the starting bid is one bitcoin. Each contingent is enough to operate a masternode. Since you absolutely want a sample Coin Masternode, you are bidding at the auction.
Where to put it?
But now you also want to secure the ROI and transfer the income that the masternode brings in to the DEX. Here you will find that there is much more interest in selling SampleCoin than buying it.
In other words, the project has been listed but the market is illiquid. Little capital comes in. ExampleCoin is still doing well in the first few months. The purchase order book is thin, but at least there are interested parties who buy enough for the price to rise.
However, you will quickly find out that it is not easy to get out of ExampleCoin. If you were to try to sell everything in one fell swoop, the price would drop massively. If you place your sell order above the highest bid, you are not alone, but among many. In this case, you would have to be patient until someone buys the sum. If the market for example coin isn’t growing, then sit on it.
This is also the reason why you cannot get rich quick with ExampleCoin. Sure, you’ve had enough of it, but who will buy it from you?
On paper, 10000% ROI stands for SampleCoin, but you can only enjoy it if your rewards are bought at a corresponding rate. If the market remains illiquid, nothing will come of the easy money.
Dev left. Coin dead.
The worst that can happen to you now is bad news for the project. If the trust of the other investors is lost, the price for ExampleCoin can collapse massively. Because there is still hardly any interest from buyers. A non-exhaustive list of common problems:
- The developer leaves the project or simply disappears
- Someone discovers a fraud and makes it public
- Someone claims there is a scam and hears them (FUD)
- The Exchange denotes the sample coin
Allegations of fraud are common in the crypto scene. Most are directed against people or actors. Others relate to bugs in the software’s code that were intentionally built in by the developers to secretly generate a profit.
The latter has happened more than once and represents the death sentence for a project. Even if allegations are fabricated, they can create great uncertainty and bring the course to a collapse. If a crypto currency is denoted, then it’s all over. At least when she is as young as ExampleCoin.