Who Benefits from Masternodes?

Scalable Networks

Networks with a staking consensus mechanism typically offer a much higher transaction per second rate (“TPS”) than their counterpart Proof of Work networks. Decreased latency, transaction times and lower fees are all a byproduct of systems that can process higher numbers of TPS.

Incentivized Nodes

As the name might imply, masternode systems are networks where token holders are also incentivized to run nodes.

Many of the first generation blockchain networks provide no such incentive. Outside of a select group of miners, running an Ethereum full node is not only technically challenging but can be considered nothing more than a donation, economically speaking.

The sheer size of running a full node on Ethereum (Ethereum’s size surpassing 1TB) means that a very limited group of individuals will even be able to contemplate running a node moving forward.

The term “centralization” gets thrown around quite a bit in the crypto community nowadays. We define this as a select group of individuals (or entities) responsible for the maintenance and decision making of a distributed network.

The importance of maintaining a distributed and robust system of nodes cannot be stressed enough and we feel that masternodes offer an economic incentive, to a broader audience, for one of crypto’s most pressing problems.

Investors’ Considerations

Masternodes afford investors the ability to generate passive income. As a byproduct, an investor can lower their average entry point and buffer downside risk. While fantastic in any market, income generation is especially useful in bear markets (such as the one we are currently in).

In 2017, tokens associated with a masternode network returned ~348x, whereas the overall crypto market returned ~38x. This comparison is not entirely shocking given a historic bull market and an earlier stage in the life cycle for masternode projects. While this is an apples to oranges comparison, it does provide perspective on upside scenarios for expected value calculations.

There is no other asset class where 100x+ returns are as readily available as the crypto markets. A savvy investor has the opportunity to take block rewards from owned masternodes and reinvest into additional masternodes.

Protection Against 51% Attacks

A 51% attack on a Proof of Work (PoW) network, like Bitcoin or Monero, occurs when >51% of the hash power on a blockchain is acquired by a single miner. The attacker then exploits this power to generate a profit, either by shorting the underlying asset or creating false double-spend transactions.

51% attacks are much more difficult to execute in a masternode (or Proof of Stake (PoS) system) because they tend to be difficult to exploit economically.

Introductory Video Explaining 51% Attacks, a problem that has plagued numerous PoW projects, the most notable being Verge. (Source: 99 Bitcoins)

In a masternode network, an attacker would need to acquire a significant % of the masternodes of a network. While not impossible, this is a much more expensive proposition than simply renting hash power for a short period of time.

If a bad actor tried to take down the network he/she would ultimately be crippling the value of the underlying assets they hold in collateral. If you are looking for more information on this topic, there fantastic thread on Reddit: “How does PoS prevent a 51% Attack?”.

Greater Accessibility & Decreased Reliance on Wasteful Practices

The barriers to entry are substantially lower for setting up a masternode than mining a PoW blockchain.

A significant majority of even the most fanatical crypto enthusiasts are unable (or unwilling) to accumulate the necessary resources to mine a PoW blockchain. The barriers to entry, include: expensive and rapidly obsolete hardware, availability of electricity/HVAC & a suitable facility, technical know-how, monitoring software, etc..

Basic comparison of Proof of Work (PoW) vs. Proof of Stake (PoS). (Source: Steemit)

We believe many of these same people will be able to participate in the ownership of masternodes. This will offer networks the ability to build infrastructure out from a much wider audience, as well as having a more equitably incentivized community.

The environmental impacts of PoW Mining are typically overstated, especially when you look at the comparative waste of legacy financial institutions and printing money. Yet a migration to staking systems would save a great deal of electricity, especially if future blockchains continue to make the transition from PoW to PoS.

While I do not think either of these factors will be enough to alter the path of projects like Bitcoin or Monero, I do believe that this is a legitimate factor that project developers will need to consider as the industry moves forward.