How to Earn Passively With Masternodes – A Comprehensive Guide

Crypto users who run masternodes play a key role in the operations of blockchain networks. Their contribution is never free. Instead, they earn rewards. However, to become a masternode operator, you need technical skills and a relatively huge initial investment.

This article discusses everything you need to know about masternodes and how to generate passive income by running them.

Understanding Masternodes

While an ordinary node in a network is mainly responsible for validating transactions, a masternode, on the other hand, conducts extra responsibilities like participating in blockchain’s governance decisions and facilitating fast transactions.

Requirements to Run a Masternode

Crypto users are required to stake a significant amount of a network’s native token to host masternodes. For example, if you want to operate a masternode on the Dash network, you must stake at least 1,000 Dash tokens.

After that, the next step involves configuring a dedicated computer in the blockchain and synchronizing it with the network’s ledger. The computer must meet the blockchain’s requirements for storage, processing power, and memory.

Upon configuring the masternode software, you need to use your token stake’s transaction ID as well as the output index to activate your masternode. After that, you can monitor the performance of your masternode and ensure it’s always synchronized with the network.

Types of Rewards for Masternode Operators

As mentioned earlier, blockchain users receive rewards in exchange for running a masternode. Here are the rewards you can expect to receive as a Masternode operator.

Block Rewards

Operators of masternodes get a certain percentage of generated block rewards on a blockchain. Miners are the other individuals that receive these rewards.

Transaction Fees

A masternode processes and validates transactions in exchange for a portion of the collected fees paid by users. Transaction validation is a key process as it helps to keep blockchains secure and efficient.

Service Fees

Masternodes are tasked with delivering extra services like advanced privacy features and instant transactions to users willing to pay additional fees. Part of these fees goes to the wallets of masternode operators.

Governance Participation

As mentioned earlier, parties that run masternodes are allowed to participate in the governance of blockchains. In some instances, networks may offer rewards to masternode operators for raising and voting on proposals that fuel development.

Staking Rewards

By staking a native token of a particular network, masternode operators earn yield like other stakers on the blockchain. Energi is one of the networks that provide high staking rewards to operators of masternodes.

Operating Multiple Masternodes

If you have enough financial muscles, you can set up and operate masternodes on various blockchains to multiply your passive income. Moreover, blockchains like Horizen allow users to run several masternodes within the network.

Benefits of Running Masternodes

1. While the initial investment might be out of reach for many crypto users, rewards generated from running masternodes are considerably high.

2. Operating a masternode isn’t limited to people in certain regions. Instead, it is accessible to crypto users across the world.

Risks of Running Masternodes

Market Volatility

As we all know, the crypto market is extremely volatile, meaning your staked tokens as a masternode operator can drop in value within minutes, causing significant financial losses.

Network Security

While masternodes play a crucial role in enhancing the security of networks, they’re vulnerable to cyberattacks like DDOs (Distributed Denial-or-Service) attacks.

Technical Risks

As stated, masternode operations require technical knowledge. Therefore, misconfiguration can lead to downtime, thus affecting your rewards.

Operational Costs

You will incur some costs, such as electricity bills, to run a masternode. If your earnings fail to cover these expenses, you’ll suffer losses.

Lock-Up Period

When you stake tokens to become a masternode operator, your stake is considered collateral and is locked up for a specific period. During this time, you cannot liquidate your tokens even when their prices drop.

Competition

If a network has numerous masternode operators, then the rewards to be distributed are likely to decline due to stiff competition. Reduced rewards can pose a massive risk to your profitability.