Share this article

The two most dangerous words in the cryptocurrency world are: passive income. Whenever someone tells you it’s possible to make real money—without burning your house down—it’s usually a good sign that you should run in the opposite direction.

So you might find it surprising to find that many long-term hodlers are making serious monthly income, and even more surprising that they don’t get scammed.

Here’s the non-technical explanation: for certain coins, Masternodes offer a second-level of mining, with users getting high rewards in exchange for providing high-level network services. Originally pioneered by Dash, the system has since been implemented or adopted by over 300 cryptocurrencies.

It’s not for everyone, though, since a Masternode requires a bond that’s typically worth thousands of dollars.

Master-what?

If you took civics class, you probably slept through a lesson on the different kinds of governments. Some early societies voted on everything, but as cities grew, power became centralized.

Online governance faces the same sorts of problems. Some communities settle their disputes by consensus (Bitcoin). Others take turns (staking), or elect leaders to make decisions (delegated proof-of-stake), and some let the King decide (Visa).

The problem facing cryptocurrency is this: blockchains are very good at being an immutable ledger, and not very good at anything else. They’re great if you need a trustless database without counterparty risk. If you want efficiency, stick with Visa.

A masternode system improves upon a blockchain by turning it into two networks: one a regular network, like Bitcoin, and on top of that an incentivized network of powerful nodes to provide higher-level infrastructure. The lower network verifies the proof-of-work, and the upper network does the hard math.

Proof-of-Service

Here’s how Masternodes solve the efficiency problem.

Let’s say you’re tied to a chair in a basement where the Yakuza are torturing you for money. You could make a normal transaction and wait for the requisite six confirmations, but in that time, they’d probably take another finger.

Or, you could route your payment through a quorum of Masternodes, who (for a fee) move your payment at the front of the line. You could also use the Masternode network to make your payment anonymous, by mixing it with other transactions.

Other Masternodes have different functions. In Syscoin, Masternodes are used to maintain decentralized marketplaces, allowing up to 700 transactions per second. In BOScoin they execute smart contracts.

Community Spending

There’s another benefit to the Masternode system: solving the Tragedy of the Commons.

Remember when Verge was offered that Pornhub partnership? It was one of the biggest events of the year, but the only way to raise the money was by rattling a tin cup. No wonder Pornhub ditched them for Tron.

In most crypto communities, group-wide decisions are about as binding as those useless UN resolutions. With a Masternode treasury, the community can coordinate its resources and efforts to develop its network.

Not all Masternode coins come with a treasury system, but those that do are able to fund and develop their networks professionally—no begging required. Dash, SmartCash and PIVX each allocate a percentage of their mining (or forging) rewards to a treasury, which is usually spent on community development like bug bounties or PR. Masternodes have also voted to fund education videos, genetic Cannabis research, and dumb sci-fi shows.

Some Problems with Masternodes

That might sound a bit centralized—and it is, no matter how much Masternode advocates might deny it. But, among supporters, it represents an acceptable compromise between decentralized values and centralized efficiency.

There is a thornier objection to be made that Masternodes make it easier to game or manipulate the system. This is why Masternodes are (by design) so expensive: not only is it impossibly expensive to attack the network, no one’s going to endanger a network in which they’ve invested a million dollars.

It’s still mathematically possible for a cartel of Masternodes to game the system, and in smaller MN networks that remains a real possibility. However, it’s much harder to coordinate a conspiracy among a few thousand masternodes than among the 21 EOS block producers.

That might not satisfy the most hard-nosed cypherpunks, but there’s something to be said for solutions that actually work. While Bitcoin Cash is still struggling to solve 0-conf transactions, and Lightning engineers are cursing at their whiteboards, Masternode currencies have been running instant transactions for four years.

Disclaimer: The author has investments in Bitcoin, Bitcoin Cash and Dash, which are mentioned in this article. He once turned down the chance to invest in a Masternode, and has been kicking himself ever since.