I. What is a masternode and what does it do?
Masternodes are a type of full node that offer various services to the network and are compensated by the network for those functions; they are a cryptocurrency computer wallet that keeps the full copy of a blockchain in real-life. However, this is utilized to achieve unique and revolutionary functions in ways ordinary nodes cannot. These are some of the special functions that nodes perform: increasing the privacy of transactions; doing instant transactions; participating in governance and voting; or enabling budgeting and treasury system in cryptos.
These special nodes get rewards by sharing in the block compensation because they provide special services to the network. Additionally, masternodes require a certain number of coins as collateral. Finally, masternodes perform advanced functions for the network beyond the mere sending of transactions. Three of Dash’s distinguishing features – InstantSend, PrivateSend and Decentralized Governance by Blockchain (DGBB) – are all powered by masternodes.
II. Operating a masternode
Masternodes cost money and effort to host, so they are paid a share of the block reward to incentivize their operation and maintenance. There is an entry barrier in that one needs to commit or collateralize certain units of that particular cryptocurrency to run a masternode. In the case of Dash the required collateral is 1,000 DASH, but this number differs with each currency. The collateral is required to prevent Sybil attacks on the network, whereby an attacker could create numerous masternodes and interfere with network operations. With Dash, this collateral can be moved or spent at any time. It is not “locked,” although moving or spending the collateral will result in the associated masternode going offline.
III, Return on investment (ROI)
As previously mentioned, masternodes are compensated for their services via the network. For example, with Dash and Crown, the mining reward is split so that 45 percent of the mining reward goes to masternodes, 10 percent goes to a development fund, and 45 percent to the miner who found the block.
Dash pays masternodes based on a deterministic schedule so that each node is paid in a round-robin fashion until all nodes have been paid. However, Dash does add a small bit of variance so the system cannot be gamed. There is a very small chance that a masternode can be skipped or double paid in a cycle. Other currencies handle masternode selection and payment differently.
Dash’s current annual return on investment is about 7 percent, while other projects provide an ROI as high as 20 percent on average. This reward falls off or surges in subsequent years, as it depends on the value and the supply of the coin running on the masternode (which should still be sufficiently incentivized). Of course, investors also expect their underlying collateral value to increase with time, making these projects a win-win. For example, in a few months, Crown’s market capitalization ballooned from under $200,000 to over $15 million. What was the change that prompted this massive growth? The addition of masternodes.
What is a shared masternode?
To make a masternode, it takes a lot of coins that are worth a lot of money, and not everyone can afford it. Others don’t want to deposit sufficient funds into just one coin (they’d rather spread their investment across multiple coins). To get around this, people come together and pool their coins, with each taking part of the reward. This is known as a shared masternode or shared community masternode.
How does your shared masternode work?
The total number of coins needed for a masternode is divided equally into a certain number of seats, and people can essentially buy those seats to take part in a masternode for as low as a tenth of the total coins needed for a solo masternode.
Each seat has an equal share in the rewards generated by the masternode.
When all the seats are filled, the masternode is started.
We run the masternode and every day/week we will send the rewards gained by the masternode to all the seat holders at their chosen destination.
If a seat holder asks for a withdrawal by following the withdrawal rules, then their coins (coins for seat - deposit fee + weeks reward) are returned to them and a new person is recruited to take their seat. If the search for a new person proves unsuccessful, then the masternode will be dismantled and every seat holder will receive their coins back.
Is there a deposit fee?
Yes, the deposit fee is factored into the per-seat coin requirement (i.e. if a masternode requires 1,000 coins and is divided into 10 seats, and the deposit fee is 0.1 percent, then a seat costs 100.1 coins). This fee is valid for the time period of the masternode specified above (i.e. even if you withdraw your coins before the end of the masternode, the fee will not be returned for that masternode. but you can re-enter any masternode for that coin before the period ends without paying any more deposit fees).
Is there a reward fee?
Yes, there will be a minimal fee applied to the rewards which are paid weekly (i.e. if there are 10 seats in a masternode and we get a reward of 100 in a week, and the reward fee is 5 percent, then each seat will get 9.5 coins as rewards for that week).
Is there a withdrawal fee?
No withdrawal fee will be charged. However, in cases of premature withdrawal you will be forfeiting your deposit amount, which you can use to join a masternode for the same coin in the future.