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.
Also read: PoS vs Masternodes
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.