Long before Proof of Stake entered crypto consciousness, people were staking Proof of Work coins. In return for locking up a portion of tokens and running a masternode, you can earn verification rewards. Earning a passive income while helping to secure a network sounds as comfortable as it does noble. The reality, however, is that most masternode coins are a scam.
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Loads of Nodes But Little Utility
Every trader has a strategy for profiting through good times and lean. Some buy into ICOs and wait for the market to recover; some scalp profits where they can through day trading; and some set up masternodes. Dash is the altcoin credited with starting the craze for masternodes. Back when the coin was trading for under a dollar, the Proof of Work coin introduced a masternode system that called for staking 1,000 Dash.
The scheme proved hugely successful, both as a means of governing the network, and as an earner for individuals running a node, who were being handsomely compensated by the time the crypto market mooned in 2017. At its peak, it would have cost $1.5 million to purchase enough Dash to set up a masternode. The success of the scheme, which made early adopters of Dash’s masternode system very rich, was soon copied by countless other coins. Dash has at least a modicum of real world utility, but most of the copycats that have sprung up since serve no purpose other than to enrich their early adopters and stakers.
Masternode Coins Are the New Lending Platforms
The crypto winter of 2018 has been especially unkind to masternode coins. Dash has been on a slide since mid December, when it peaked at $1,580 a coin, and sits at $320 today. Lesser known masternode coins have fared even worse. Yearto.Date maintains a list of the best and worst performing masternode coins of 2018, and it isn’t pretty – even the third best performing coin of the year is in the red.
Although masternode coins aren’t a scam in the Bitconnect sense, like lending platforms they’re a scheme which looks profitable in a bull market when everything’s pumping, but when the tide turns gets badly found out. Sites like Cryptopia and Trade Satoshi are graveyards where abandoned masternode coins go to die.
Masternodes as a Service
Setting up a masternode is relatively straightforward – all it takes is a VPS and the ability to change a few lines of Linux code – but for those who lack the knowhow, services such as Digital Price will handle setup and hosting. Even without getting your hands dirty, running a masternode is still a risky business given the potential for your staked coins to shed 90% of their value in a matter of months. The volatility works both ways though, and it’s also possible to reap huge profits from masternode coins that pump, typically because they’re being bought in bulk by other traders also looking to stake coins. This sort of system is unsustainable of course, and when a bunch of node operators all decide to offload their surplus coins, the market crashes.
Despite these inherent weaknesses, the concept of masternodes remains a solid one: it’s just that for the system to work, the network must be worth protecting in the first place, and for that to happen the coin needs to be used for something other than staking – like remittance, P2P payments, or ecommerce. As a result, it makes more sense for developers to focus on generating demand for a blockchain first instead of launching masternodes and hoping that the utility follows. Newer projects such as Origin Protocol, Dadi, Essentia, REMME, and Zencash will all be adding masternodes in the future. The difference, with these networks, is that nodes will be a feature rather than the defining characteristic. The next generation of masternode coins might actually be worth something. The current generation are mostly scamcoins.
Do you think most masternode coins are a scam, or do they serve a purpose aside from providing a passive income to stakers? Let us know in the comments section below.
Images courtesy of Shutterstock, Yearto.Date and Masternodes.online.