Dash is the first cryptocurrency to incorporate a two tiered network. The first tier is comprised of PoW miners who are responsible for the creation of new blocks and the security of the network. Whereas the second tier consist of Masternodes. These masternodes are special nodes that are created to enhance stability and provide unique functionalities to the network.
Masternodes lock a certain amount of coins and performs various tasks within the blockchain. For providing certain services within the ecosystem the masternode operators are rewarded. Since this system proven to benefit both the investors and the cryptocurrency network many coins followed Dash’s footsteps. In the recent years Masternodes become more popular in the cryptosphere as it is a great passive income source. Currently masternode system is a part of many PoW and PoS cryptocurrencies.
Most masternode coins have a similar reward system that is for each single block one masternode in the network wins the reward. On the other hand few masternode coins came up with an idea of layered masternode system aka masternode tiers with different coin requirements and incentive models. These tiered masternodes have become more common lately. So what are tiered masternodes and how do they work? Before we see that here is something that you need to know about masternodes in general.
Within DASH ecosystem, a masternode is a node or a computer. Just like any other nodes on the network Masternodes host a full copy of the blockchain. However they are different from ordinary nodes as their main purpose is to provide special functions to the network. They increase privacy of transactions, enables instant transaction, participate in governance and enables budget and treasury system. Moreover they help in decentralization of the network. These are all some of the common functionalities of masternodes.
While the functionalities remain the same; the requirements and the reward system varies from coin to coin. For example to operate a Dash masternode, 1000 DASH coins are required as a collateral, in PIVX its 10,000 and in SysCoin the required collateral amount is 100,000. This collateral amount is required to prevent Sybil attacks whereby an user can create numerous masternodes and engage in malicious activity.
When a user posses enough coins they can lock the amount in their masternode wallet and earn rewards for their contribution. Although anyone can run a masternode; most masternode coins have an entry barrier. Mostly it’s the amount of coins that is needed to operate a masternode. For example when Dash introduced masternodes then price of 1000 Dash was not more than $3000. But in current situation Dash masternodes are practically unaffordable. Due to high value of the masternode prices new users are locked out of participating in the masternode ecosystem.
To make it possible for everyone to afford and setup a masternode; few coins incorporated multi tiered masternode system.
Tiered masternodes are an innovative multi level masternode concept which can be found on few masternode coins. Some coin features 3 tiered masternodes, some has 4 tiers and some even operates 5 tiered masternodes. Each tiers needs different collateral amount and each brings a variety of income. Usually lower tiers are easily accessible by everyone and higher tiers require bigger investment. User can choose any tier to run a masternode and they will receive rewards based on their tier. Basically lower tier offers lower rewards and higher tiers offer very higher rewards. The chance of earning rewards at each level increases linearly with the number of coins. It’s like the more you invest the more your rewards are.
In general a multi tiered node system is designed to enable different levels of affordability. This concept is beneficial in terms of attracting new users to the project. Smaller barrier of entry means more people will have the opportunity to run masternode. When more people operate masternodes the rewards gets well distributed and hence the network becomes massively decentralized.
While tiered masternode structure may sound appealing and has some advantages there are also some drawbacks to it. Although high number of masternodes contribute in keeping the system decentralized they can also compromise the security of the network especially if the coin is PoS. Increase in masternode numbers will reduce the number of PoS users thus weakening the network security. Also for investors it poses some risks. Those who opt the top tier will earn more rewards however they are the ones at high risk of losing more money. On the other hand lower tier involves low risk however they look similar to proof of stake system in terms of rewards. Hope it helps.
Whatever! Do note that masternodes are a highly risky investment. Before you invest in any masternode coin kindly do your own research.The information provided in this article is only for educational purposes. None of this is investment advice and Coin Guides is not responsible for any financial losses.
Staking is the process of holding funds in a cryptocurrency wallet to support the operations of a blockchain network. Essentially, it consists of locking cryptocurrencies to receive rewards. In most cases, the process relies on users participating in blockchain activities through a personal crypto wallet, such as Trust Wallet.
The concept of staking is closely related to the Proof of Stake (PoS) mechanism. It is used in many blockchains that are based on PoS or one of its many variants.
Who created Proof of Stake?
Sunny King and Scott Nadal were likely the first to introduce the ideas of Proof of Stake and staking, back in 2012. They described Peercoin as an innovative PoS cryptocurrency. It was initially based on a hybrid PoW/PoS mechanism but gradually phased out its emphasis on Proof of Work (PoW). This allowed users to mine and support the project in the early stages, without becoming fully reliant on a PoS system.
In 2014, Daniel Larimer developed the so-called Delegated Proof of Stake (DPoS) mechanism. It was first used as part of the Bitshares network, but other cryptocurrencies adopted the same model. Notably, Larimer also created Steem and EOS, which also adopt the DPoS model.
DPoS allows users to commit their balances as votes, which are used to elect a certain number of delegates. Then, the elected delegates manage the blockchain operations on behalf of their voters, ensuring security and consensus. Also, stakeholders are able to stake their coins, receiving periodic rewards for holding funds.
The DPoS model tends to reduce latency and increase the throughput of a network (i.e., it can perform more transactions per second). Mainly because it allows for consensus to be achieved with a lower number of validating nodes. On the other hand, it usually results in a lower degree of decentralization as users rely on a select group of nodes.
How does staking work?
As mentioned, staking is the process of holding funds to receive rewards, while contributing to the operations of a blockchain. As such, staking is widely used on networks that adopt the Proof of Stake (PoS) consensus mechanism or one of its variants.
Unlike Proof of Work (PoW) blockchains that rely on mining to verify and validate new blocks, PoS chains produce and validate new blocks through staking. This allows for blocks to be produced without relying on mining hardware (ASICs). So, instead of competing for the next block with heavy computation work, PoS validators are selected based on the number of coins they are committing to stake.
Typically, users that stake larger amounts of coins have a higher chance of being chosen as the next block validator. While ASICs mining requires a significant investment in hardware, staking requires a direct investment (and commitment) in the cryptocurrency. Each PoS blockchain has its particular staking currency.
The production of blocks via staking enables a higher degree of scalability. This is one of the reasons the Ethereum network will eventually migrate from PoW to PoS, in the Ethereum Casper upgrade.
Some chains adopt the Delegated Proof of Staking (DPoS) model. It allows users to simply signal their support through other participants of the network. In other words, a trusted participant works on behalf of users during decision-making events.
The delegated validators (nodes) are the ones that handle the major operations and overall governance of a blockchain network. They participate in the processes of reaching consensus and defining key governance parameters.
For some networks, staking rewards are determined as a fixed percentage “inflation” rate. This encourages individuals to utilize their coins (rather than only HODL). This process amortizes the operational costs of the network to all token holders.
For example, Stellar distributes its inflation weekly to users that are staking their coins through a staking pool. One benefit of this approach is that the network can disburse a fixed or controlled interest rate.
As a result, if a user holds 10,000 XLM for one year and specifies an inflation destination on-chain by signing a transaction, they should expect to earn 100 XLM in rewards. That would happen over the course of a year at a balanced inflation rate of 1% (ignoring compounding effects).
Also, the information can be displayed to all network users who are deciding whether or not to stake. This could incentivize new stakers as it provides a predictable reward schedule rather than a probabilistic chance of receiving a block reward.
A staking pool is formed when several coin holders merge their resources to increase their chances of validating blocks and receiving rewards. They combine their staking power and share the eventual block rewards proportionally to their individual contributions.
Pools are most effective in networks where the barrier to entry, whether technical or financial, is relatively high. Often, pools require significant setup, development, and maintenance. As such, many pool providers charge a fee as a percentage of the staking rewards distributed to participants.
Other than that, pools may provide additional flexibility in regards to withdrawal times, unbinding times, and minimum balances on the network. Thus, new users would be encouraged to participate, leading to a greater network decentralization.
Cold staking refers to the process of staking on a crypto wallet that has no connection to the Internet, i.e., a hardware wallet. Networks that support cold staking allow users to stake while securely holding their funds. However, if the stakeholder moves the coins out of the cold storage, the stakeholder will stop receiving rewards. This method is particularly useful in allowing large stakeholders in the network to ensure maximum protection of their funds while still supporting the network.
With more and more options and avenues for users to participate financially in the consensus and governance of blockchains, the growth of staking will likely lower the barriers to entry to the crypto ecosystem. Binance is eager to support blockchains powered by Proof of Stake and will allow users to stake and earn rewards directly on Binance.com.
I am sure a lot of us have heard about decentralization, blockchain and bitcoin, ethereum and many other cryptos. Putting some of these ideas into context, many of us have a hard time explaining the different kind of decentralization and the reason why decentralization is a good idea and why decentralization makes sense in some areas and why in some areas it doesn’t make any sense at all.
First of all, decentralization in general is not a new idea. we had human civilization for ten thousand years and over these years we had a lots of instances of centralized things such as centralized governments, centralized companies, centralized cites and some decentralized thing. There are some examples that even before we had computers, IT, we had various instances of decentralized economies , decentralized ways of interacting. For example looking at the insurance industries, we generally have insurance because of national government program or because we are buying insurance as a product provided by various insurance companies. But the way that insurance companies started in the first place as, a group of people coming together and making a contract of mutual understanding that all have ship and if one of my ship gets captured by pirates or gets damaged we can help each other cover the cost. This decentralized model is something that existed for quite a while.
Looking at the software industry, we have some decentralized application for quite a while such as BitTorrent. We have had decentralized network for sending files from one network to another. If we look at email, in some ways its a semi-decentralized protocol. You can access email though gmail, or Microsoft’s email or through some other email service or theoretically you could set up your own server. If you want to download some files, BitTorrent is one great way to do that. In fact, its something a lot of software developers use as a primary way of distributing data they produced to the user. Generally, if you use open source package, the developers don’t even have resources to actually setup and maintain the infrastructure to centrally upload and send their software to tens and billions of user. And a lot of times they use a means of decentralized network as a way of solving this problem.
In 2009 Satoshi Nakamoto came up with the idea behind bitcoin. He describes it as a peer to peer electronic cash system. Since then computer scientists and cyber punks have been interested in these idea of decentralization though blockchain for quite a while. But the one major application that they had really hard time is money. They figured how to decentralized messaging, sending decentralized files but currency is the one application that ended up taking a lot time to develop. Back in the 1980’s and 1990’s there were various kind of cryptographic emoney but coming up with a version that doesn’t rely on one central party that vanishes the whole system actually proved to be really challenging.
Ethereum is another project with the goal of bringing the idea behind bitcoin, the blockchain technology and try to make it more generalized. It has come up with a architecture that we can use to build decentralized application in a very general sense.
There are a lots of people trying to define decentralization. In my opinion most people that are trying to do this tend not to come up with a good classification. Many people think decentralized and distributed are synonyms and there are people who agree on particular way categorizing it. I mostly agree with Vitalik Buterin’s way of classification of decentralization. He categorized Decentralization into 3 types:-Architectural Decentralization, Political Decentralization and Logical decentralization.
When people talk about blockchain they actually tend to talk about the benefit of having single database instead of having a local private database that are used by many institutions and banks which have very complex and inefficient process for reconciling between them. This is where logical decentralization plays a important role. Logical decentralization has the zero probability of system failure and can tolerate any accidental faults in the system. A attack aimed at disestablishing the system will have minimal or null effect on it. Lastly, a local system cannot act independently which also maximize the efficiency of the decentralized system as a whole.