Key takeaways
- Masternodes offer the opportunity to generate passive income through cryptocurrency rewards.
- Operators need to stake masternode coins and participate in running the blockchain to earn masternode rewards.
- Setting up a masternode requires a significant upfront investment in coins and hardware.
- Careful research and planning are required to ensure a project’s reliability and masternode profitability.
Passive income has been a big buzzword these days. Earn money while you sleep — that’s the dream. One intriguing option for crypto lovers is a masternode investment. You can earn passive income while supporting a blockchain network.
These specialist nodes are crucial in maintaining networks, processing transactions and implementing governance. Setting up a masternode profitably does require technical know-how and a significant initial investment. You’ll need to buy and hold a certain amount of crypto and run a special server to operate the node and receive rewards.
In this guide, you’ll learn about pros and cons of masternodes, how they work and passive income opportunities.
What is a masternode?
A masternode is a special type of cryptocurrency node used to execute critical functions on a blockchain network. They go beyond basic node functionality and need a significant coin stake to operate.
So, what is a node? A normal crypto node is an independent computer that relays and validates transactions. It also stores and maintains a copy of the blockchain ledger.
Masternodes go one step further to perform functions such as processing faster transactions, increasing privacy and joining governance decisions. In addition, they’ll add decentralized storage and data verification.
From a technical aspect, you’ll find that masternodes differ in a few ways:
- Higher hardware requirements
- Larger coin stake
- Complex setup process
- Increased operator rewards.
Did you know? Dash invented the first masternode-based cryptocurrency in 2014 and is now a known project among investors, with 3,000 masternodes in 20 countries.
How masternodes work
There are two main masternode requirements. First, you must own a specific amount of cryptocurrency to use as “collateral.” This collateral is then locked to the network in a process called staking. Secondly, you need enough processing power and storage capacity in your hardware.
The masternode staking requirements differ from network to network. To give you an example, a Dash masternode needs 1,000 Dash (DASH) coins. As of December 2024, that’s around $40,000, a significant investment designed to ensure network security and stability.
Once your masternode is running, you’ll be eligible for rewards — aka passive income! In return for your participation in validation and governance, you’ll receive regular payouts. Masternode earnings are tied to the specific function and service performed on a blockchain network. This can include:
- Block rewards: Receive a slice of block rewards generated on the network.
- Transaction fees: Validating transactions earns a share of the transaction fee.
- Service fees: For performing extra services like enhanced privacy or instant transactions.
- Governance participation: Voting on proposals and network upgrades.
- Staking rewards: Earn directly from the amount of collateral staked.
Payouts vary depending on the project. On the Dash network, masternode payments are randomly selected for each block (every 2.6 minutes). It’s not possible to predict when exactly your payment will occur. But on Evonode, masternodes are paid at the end of each “epoch,” roughly every 10 days.
Did you know? The name Dash is a combination of the words “digital” and “cash.” The project aims to be the default internet currency with a focus on user-friendly, scalable and fast payments.
Benefits of running a masternode
Running a masternode has several advantages for cryptocurrency owners. These include:
- Passive income: The primary benefit is the potential to earn passive income via staking rewards. It’s like earning interest on your cryptocurrency holdings.
- Enhanced network security: Contributing computing power helps validate and maintain network integrity and strength.
- Voting rights: You can gain influence over decisions and upgrades made on a blockchain. This means you have a say in the future of a cryptocurrency.
- Priority transactions: As a masternode operator, you often get priority processing for your own transactions. Handy during high network congestion.
- Community standing: You demonstrate a strong commitment to a project. This builds respect and recognition within the crypto community.
Masternodes for passive income, explained
You can choose several cryptocurrencies offering masternode opportunities to earn passive income. Dash, PIVX and Firo (previously Zcoin) are three well-known options.
Dash masternodes need a substantial investment of 1,000 DASH as staking collateral. That’s over $20,000 worth of coins. This initial cost is high, but you can benefit from a stable blockchain with consistent rewards. Masternode operators can earn 7%–8% annually on their investment.
PIVX is cheaper to get started. You’ll need 10,000 PIVX coins, worth around $1,500 at the time of writing. It’s a reliable masternode if you have a small budget. Masternode operators can earn 18%–19% annually on their investment.
Firo masternodes require 1,000 FIRO collateral, around $1,000 at the time of writing. It’s an accessible option for your first operation. Masternode operators can earn 19%–20% annually on their investment.
When choosing your masternode, consider the following:
- Initial investment required
- Potential masternode return on investment
- Network stability and longevity
- Technical requirements and processing power.
Did you know? Firo was originally called Zcoin. It launched in 2016 using the Zerocoin protocol, but as the project innovations changed over time, it made the story less relevant. So, in 2020, it rebranded to Firo to align with the new privacy focus and the future of masternodes.
Steps to set up a masternode
Once you meet the specific crypto and hardware requirements to run a masternode, you can set one up. Here are the technical steps to a masternode setup:
- Set up a server or virtual private server (VPS). Linux is generally recommended for hosting a masternode. Specialist masternode hosting service providers offer managed servers to set this up for you.
- Install a cryptocurrency wallet on your computer and masternode servers.
- Send the required collateral to your control wallet address and set it as your official collateral for the network.
- Configure the masternode by creating a custom configuration file including your username, password, VPS IP and private key.
- Now everything is set up; you can synchronize your masternode with the blockchain. This might take a while as it downloads the entire blockchain ledger.
- Enable the masternode from your local wallet. Be sure to monitor its status to make sure it’s running properly.
The exact operating steps vary slightly depending on the cryptocurrency. So, make sure to follow the technical guides for your chosen network.
Before beginning, make sure your dedicated computer or VPS has the minimum technical specifications. You’ll need at least 2 gigabytes of RAM, 50GB of storage and stable broadband.
Once up and running, masternode security and maintenance are paramount. If you don’t follow best practices, you’ll leave the masternode vulnerable to hacks and network penalties. Be sure you always:
- Update software regularly
- Monitor system resources
- Backup wallets and private keys
- Use strong passwords and two-factor authentication
- Integrate firewalls and security updates to your VPS.
How to avoid masternode scams
It’s easy to get sucked into a scam in the cryptocurrency world. Always stay vigilant, do your research, and validate a blockchain’s legitimacy before committing your funds.
Look for projects with detailed, clear roadmaps, along with transparent, respected team members. Legitimate masternode projects usually have an up-to-date GitHub page and routine code updates.
If a project is “too good to be true,” then beware. All too often, promises of unrealistic returns can reel in novice masternode operators. The rewards should make mathematical sense and match the network usage and tokenomics.
Common red flags include:
- Anonymous team members
- Lack of technical specification
- Brash marketing tactics
- Time pressure on investments.
Trustworthy project developers often have strong communities on Discord or Telegram with active discussions about development and network improvements.
In addition, research a coin’s price history and trading volumes. Stable or growing numbers over a few years can indicate a more reliable project.
Risks and challenges
Becoming a masternode operator isn’t for everyone. You’ll need to navigate several risks and challenges, including:
- You must acquire a large amount of the correct cryptocurrency to stake as your collateral. This can cost tens of thousands of dollars and gets even more expensive as crypto prices appreciate.
- Installing and maintaining your masternode demands technical skills, including server management. Plus a deep understanding of blockchain rules, requirements and governance processes.
- Market volatility can lead to the value of your collateral fluctuating wildly. In addition, resource barriers leading to fewer masternode operators can result in network centralization and a loss of confidence in the cryptocurrency.
- Network issues or masternode mismanagement can lead to the loss of your staked cryptocurrency.
Thus, the above-mentioned hurdles require careful consideration. Aspiring operators must weigh the rewards against the risks to determine whether this passive income opportunity aligns with their financial goals and technical expertise.
