What are Masternodes? A Beginner’s Guide

Digital currencies work on the Blockchain Technology. This is the underlying technology that not just helps in settling the transactions in real time and also guarantee the security.

This public ledger maintains a record of all the transactions which takes place between the members in the network.

Members of the network who keep a local copy of the ledger are called as nodes. These nodes could either be full nodes or light nodes.

Some digital currencies use a second tier for the purpose of increasing their security and also offer additional functionality. They are called “Masternodes.”

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Introduction to Masternodes

Nodes are the people responsible for mining cryptocurrency for creating new currency on that network whereas masternodes perform engaged transactions that miners can’t accomplish.

A masternode is complete node hosting the entire copy of a blockchain in real time. Hosting a masternode may be taken as a good option of passive income.

However, it is needed that masternodes stake a fixed amount of cryptocurrencies before they can be accepted as masternodes.

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Detailed View on Masternode

A blockchain works on a set of defined rules that have been mutually agreed. These mutually agreed set of terms are known as consensus mechanism.

Proof of Work and Proof of Stake are a few examples of types of consensus mechanisms. The oldest cryptocurrency, Bitcoin, works on the PoW consensus mechanism, whereby miners not just work on transaction confirmation but also add newer transaction the mainchain.

Mining is a computation intensive process and the miner is rewarded in cryptocurrencies for his work.

Proof of Work systems are energy intensive, and thus, being replaced by a more efficient mechanism called Proof of Stake.

Proof of Stake is what attributes mining power to the proportion of coins held by the miner. Masternodes are partly depending on the Proof of Stake consensus mechanism.

The very first cryptocurrency to implement masternodes was DASH, that uses a Proof of Service mechanism which comprises two tiers of networks.

The first one consists of the network of miners for achieving distributed consensus on the blockchain.

The second tier is made up of masternodes which offer special functionality like voting on budget funding or InstaSend.

Masternodes operate under a collateral based system to make sure their integrity. Masternodes are rewarded to process the transactions on the network in real time.

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Applications which involves masternodes are very flexible. It offers a balance between PoW and PoS. masternodes compensate for the limitations of PoW and offers the best of PoS.

This is something that helps in avoiding the centralized mining pools and consumes less energy than that of Proof of Work consensus mechanism.

Masternodes provide enhanced stability and network loyalty as high initial investments as well as large dividends make it less probable that operators will leave their position on the network.

Also, it can be used for keeping miners in check. The DASH model gives complete authority to masternodes to reject or orphan a block in case a miner or pool tries to manipulate the network.

Masternodes have immense potential to further democratize the decisions within the blockchain network.

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