Masternodes which are also known as ‘bonded validator systems’ are nothing but a series of servers that support a blockchain’s decentralized network. It enables many unique functions which can neither be accomplished by simple nodes nor by the miners under proof of work. So, in few simple words. Masternode is a computer wallet with full copy of a blockchain that is open and connected to the network 24/7.
Some of the unique functions provided by masternodes are:
Instant private transactions.
Reward for its owners.
Enables the treasury and budgeting system.
Allows its owners to take part in decentralized governance as well as voting.
Protects network from malicious attacks.
How do Masternodes work?
Hosting a masternode requires staking of a certain amount of currency within the network. To establish a masternode, first you need to buy significant amount of currency (collateral amount). This not only supports the network, but also ensures fair and honest behaviour from its owners.
For example: To setup dash masternode, you need to have 1000 DASH as collateral in your wallet.
Setting up a masternode
To setup a masternode, first you need to download the core wallet of the currency. You need to run it on computer that remains connected to internet 24/7 with the currency wallet open all the times. Thus, you can either rent a server or run the wallet on virtual private server (VPS).
Once wallet is staked and running with the required collateral amount, it will integrate itself as a masternode in the network and begin to generate passive income as block reward.
Each masternode based cryptocurrency has its own requirements with different staking amounts to setup and run its masternode.
Everyone who have running masternode is rewarded from the network. The amount of rewards depends on coin specs. Frequency of rewrads depends on number of blocks per day (block time) and number of running masternodes. The more masternode is running the less often you will be rewarded.
For example, in DASH 45% of block rewards is received by miners and masternode owners each and the remaining 10% goes into treasury fund which is later used for network improvements.
DASH was the first ever cryptocurrency that implemented the masternode model into its protocol. It called the new tier of masternodes its Proof-of-Service algorithm, and this second tier exists alongside the primary tier to achieve distributed consensus on the Dash blockchain. The two tiers work together to ensure that PoW and PoS maintain the Dash network. Many other coins since then have followed its footsteps and have taken anonymity to even greater level. Some of the well-known masternode coins are: PIVX, ZCoin, Syscoin etc.