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“Masternode” is a term that echoes less often in the cryptosphere these days, but not because user-controlled nodes have fallen out of favor. Rather, the nomenclature has changed, with “staking” now being used to describe the series of blockchains that fall under this banner. As an examination of proof-of-stake chains shows, masternode coins are very much alive. But as exchanges push staking as a service, are the days of user-managed masternodes numbered?
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5 years later, the Masternodes are still going strong
When smart contract platform Velas unveiled its staking masternode this week, it iterated on a system that can be traced back to Dash’s arrival on the scene in 2014. Masternodes have evolved significantly since then, with Candles‘staking program reflecting this through provisions such as pooled staking, for users unable to collect enough coins to meet the VLX 1 million threshold and minimum hardware requirements to lower technical barriers to entry.
While some technical knowledge is still required to get your node up and running, setup is considerably easier than it was in the early days. Furthermore, in the case of pooled staking services such as that offered by Velas via Coinpayments.net, getting started is as simple as sending coins to a specified wallet and then logging back in periodically to collect staking rewards. VLX rewards start at 8% of all staked coins, for example, which is roughly the same ratio as DASH.
Sites like mnrank.com provide detailed statistics on the ROI of the masternode and provide general market information on the major coins. Dash invariably tops the list, followed by the likes of zcoin, nuls and horizen. Below that, things start to get more rough, with some extremely small market cap coins whose main raison d’etre is to provide a return to masternode operators. The site lists a total of 123 coins and 67,000 masternodes currently online.
At the height of the masternode craze in 2017, when New Zealand’s Cryptopia exchange was still an ongoing concern, there were hundreds of such coins, many of which promised astronomical but ultimately unsustainable returns of more than 100% per year. To get an idea of the state of staking today, you need to understand how masternodes came about.
Masternode master
There are two reasons why someone might want to operate a masternode: one intrinsic, the other extrinsic. In the first case, you could execute a node because it is convenient to do it: in exchange for blocking a tranche of coins (i.e. your stake) and validating network transactions using your node, you will be entitled to a percentage of the coins minted as a reward. In Dash’s case, the stake is set at 1,000 coins – $ 64,000 at current prices. Assuming a stable price for the dash, a node should provide a yield of just over $ 5,000 per year. It sounds like easy money, as the masternode operator holds their share and can sell those coins once their participation in the program ends. In practice, there are very few coins that can be relied upon to sustain their price for an extended period compared to BTC. Therefore, aspiring masternode operators must choose their coins wisely.
The second reason for managing a knot is due to ideological rather than pragmatic reasons. Put simply, you believe in the project and want to support it in the best possible way. In this context, maximizing ROI is less important than increasing the decentralization of the network by strengthening the number of masternodes in charge of overseeing the onchain business. Since proof-of-stake chains have no miners to turn to to include transactions in the next block, the task goes to the nodes instead. When Satoshi created Bitcoin, he anticipated that all nodes would also be miners. Eventually, mining became commodified, leading to the separation of miners and nodes. As a result, most Bitcoin node operators are read-only, able to monitor network activity, but unable to determine which transactions are included in the next block.
The commodification of staking chains
It’s not just Bitcoin mining that has become commodified over the years, with the power consolidating in the hands of specialized firms with the hardware and user base to provide economies of scale. Stake has become centralized by custodians like Huobi, Binance, is Coinbase, which automatically disburse the “passive income” or staking rewards to which the holders are entitled. Coinbase takes care of Tezos, while Binance covers a number of coins including NEO, ONT, ALGO and KMD.
There’s no such thing as a free meal, however, and while exchanges that offer staking as a service eliminate the complexity of managing your node, there are trade-offs to consider. These include the security risk of storing coins with a third party and the KYC requirements for that purpose, which erode individual privacy. There are also other concerns that affect the blockchain in question. For example, with exchanges holding most of all staked coins, they also control governance rights, effectively giving them control over protocol changes and other key decisions determined by onchain votes.
Staking as a service is undoubtedly convenient, but it eliminates one reason why nodes exist in the first place: to distribute and decentralize power, thus increasing the censorship resistance of crypto networks. Regardless, the genius has come out of the bottle now and it’s going to be hard to put it back in place now that exchanges offer a superior product in terms of user experience – be damned decentralization. Proof of stake chains such as Nervos, Koti, Fantom and Solana are set to launch their mainnets this quarter, followed by Perlin, Matic, Celo and Near in the first quarter of 2020. The term “masternode” may sound less frequently these days, but the staking game is very much alive.
Do you think centralization of staking programs through exchanges is inevitable? Let us know in the comments section below.
Images courtesy of Shutterstock.
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