To begin our discussion of masternodes, it is helpful to understand how they function in relation to their counterparts — nodes and full nodes. To do so, we’ll need to briefly discuss the role of each type of node. Keep in mind that individual blockchain networks do have subtle (and at times major) differences in structure, so the general types of nodes included here can have slightly varied roles and responsibilities based on the networks they are a part of. But, before we begin it’s important to state the one commonality amongst all nodes: they all run the software, commonly referred to as the protocol, that determines a particular blockchain’s rules, features, and functionality.
A node (sometimes called a light node or a regular node) is the most basic type of computing device that supports a blockchain network. In a general sense, a decentralized blockchain network is simply composed of all the nodes that support it. In Proof-of-Work (PoW) systems, miners are the nodes; in Proof-of-Stake (PoS) systems, staking wallets are the nodes. PoW and PoS are consensus mechanisms that allow nodes to come to agreement on the validity of transactions and, in turn, the state of the entire blockchain.
When a new set of transactions, packaged in a block, is broadcast to the entire network by one of the nodes, every other node must verify its validity. Network consensus is achieved when that block is added to all copies of the blockchain. Light nodes typically only download just enough blockchain data to process and verify new transactions, and so their computational workload is minimal. Bear in mind that full blockchains generally represent large quantities of data. For example, as of September 2020, a Bitcoin full node took up more than 300 gigabytes of space — more than many personal computers might even be able to store. Light nodes’ reduced blockchain data requirements keep them running quickly without their underlying systems getting bogged down by too much data.
A full node does everything that a regular node does, but it also contains an entire copy of the blockchain ledger, i.e. all that blockchain’s transactions, in real time. It downloads all the transactions that have ever happened on a blockchain (not just the most recent ones) and fully verifies them with other nodes. Theoretically, as long as even just one computer retains a full copy of the ledger, a blockchain network could be completely restored in the unlikely event of catastrophic failure across the network of nodes. With many decentralized computers and servers all around the world maintaining an up-to-date copy of the blockchain ledger, full nodes provide increased security to the network, since all full nodes would need to be destroyed in order for the network to cease.
This brings us to masternodes. Masternodes do not actually add new blocks to the blockchain, but instead only verify them. They also have special managing, governing, and regulatory roles depending on the blockchain protocol they participate in. The Dash protocol first added masternodes in March of 2014 in a system known as Proof of Service (PoSe). Masternodes are more commonly found in PoS ecosystems, although they can be used in PoW ecosystems as well.
A crypto masternode functions like a server on the decentralized blockchain network it supports — containing a full copy of the blockchain ledger — and takes on additional responsibilities as well. Depending on the nature of the blockchain it operates on, masternodes can govern voting events and execute protocol operations.
Crypto masternodes operate on a collateral-based system that functions much like a PoS protocol. Operators must own a significant amount of the native cryptocurrency in order to operate a masternode. In turn, masternode operators are guaranteed annual coin earnings for their services. In this way, the network ensures that its most important nodes are financially incentivized, which ultimately bolsters network stability and loyalty. For this reason, masternodes are also known as bonded validator systems. The logic is similar to staking in a PoS system.
Whether a particular blockchain protocol uses a PoW structure, PoS structure, or a different consensus structure altogether, almost every protocol includes a mechanism for rewarding the nodes that sustain the network, create blocks, and keep it functioning properly. When a cryptocurrency employs masternodes in its protocol, the masternodes typically receive a large portion of the overall block rewards, as they bear the brunt of responsibility for sustaining the network. Block rewards usually come in the form of the blockchain network’s underlying cryptocurrency awarded to nodes that have successfully verified a block.
Further, the level of processing required to generate new blocks in PoS systems is much less than in PoW systems that make use of mining. For this reason, a crypto masternode in a PoS environment can, in theory, generate more revenue with lower costs than its PoW mining counterpart — providing a strong financial incentive to operate a masternode.
In addition to the traditional Proof of Staking (PoS) rewards for mining CashHand, users are also rewarded for running and maintaining servers specials called masternodes. Masternodes are used to power Instant Send and the governance system. Users are rewarded for execute masternodes; 85% of the block’s reward is allocated to pay the masternode network.
Masternodes allow the following services:
Masternode owners must own 200 CHND, which they prove by signing a message included in a special transaction recorded on the blockchain. CashHand can be moved or spent at any time, but this will cause the masternode to leave the queue and stop earning rewards.
Masternodes cost money and effort to host, so they receive a percentage of the block’s reward as an incentive. As just one masternode is paid in each block, the frequency of payment may vary, as well as the amount of CashHand paid.
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