Proof-of-Stake vs. Masternodes
This material helps to avoid confusion between two popular governance models for cryptocurrency projects: the financial community consensus algorithm called Proof-of-Stake and the blockchain maintenance hubs called masternodes. The difference between the two is actually easier to understand than many other technical aspects of cryptocurrency.
A regular cryptocurrency wallet client software is making the computer of the user a common network member or, in other words, a node. Nodes can perform usual financial operations such as sending or receiving cryptocurrency. Another, more sophisticated type of the client software is full node - with its help, the user keeps all of the blockchain data.
Masternodes are even more involved in the network maintenance: not only they store all information on the financial transactions and automatically check their validity, they are responsible for transactions anonymization and form a cryptocurrency treasury fund. Masternode holders get guaranteed rewards for this work. The masternode system is a way to keep the blockchain updated and secure at all times. This innovation was first introduced by the development team of Dash.
Proof-of-Stake, one the other hand, is not created to keep the network intact - like any other consensus algorithm, it strictly defines how the cryptocurrency transactions are approved so that the financial community could tell acceptable operations from illicit activities.
Every cryptocurrency has its own ledger of data blocks referencing each other which makes the data tampering impossible, as the system would simply not accept a corrupted block of information. Every blockchain, in turn, needs rules on how the new blocks are formed, who does it and who receives a reward for data creation.
Unlike in Proof-of-Work (PoW) where the miner’s computing device calculation success is a main criteria of block reward distribution, Proof-of-Stake (first introduced in Peercoin) usually has two main criteria:
- the size of funds on a participant’s wallet;
- the random element.
The latter term means that although rich cryptocurrency holders have more chances to be the next candidate for becoming a block creator, it is not guaranteed. Everybody has a chance to form a block and get a subsequent reward unless the amount of funds is smaller than the minimum amount of stake set by the developers. This parameter directly depends on the network difficulty.
What’s the Difference, Again?
Attentive readers may have already found the main financial factor which separates masternodes from Proof-of-Stake. Masternodes always conduct various maintenance activities mentioned above jointly with other masternodes, while stakers may or may not form a new cryptocurrency data block, and thus, may or may not receive a corresponding reward.
Proof-of-Stake sometimes gets confused with masternodes, as evidenced by, say, this Reddit discussion. In the opening post, someone asks if Dash can be considered a Proof-of-Stake system. As an argument for this, this user states that in Dash, one should have 1000 cryptocurrency units to open a masternode and then rewards are paid simply because of this investment. They imply that it is not dissimilar to Proof-of-Stake. Here’s where this person is wrong: this money is actually reserved for a masternode, meaning you can uninstall it and withdraw the investment anytime you want. In other words, masternode owners are interested in supporting and validate the blocks correctly to keep their investment value at a high level.
As we have already clarified, PoS staking is something completely different: it’s not the sum of money you have to pay to the developers or the developers pay you, it’s the quantity of cryptocurrency units the system simply uses as a reference when choosing the next data block creator.
Masternodes, while providing a permanent passive income, are not without serious disadvantages. The most notable of them is a queue for rewards, while the random element of PoS reward distribution mechanism sometimes allows to receive new coins faster than anyone else. The masternode passive income gradually drops due to the growth of the system, while Proof-of-Stake allows to calculate
and increase your chances by changing the stake size.
While masternodes are used to efficiently maintain the blockchain of some cryptocurrency variations, the principles of PoS - the financial community consensus algorithm - are wider and the reward distribution is entirely different. Despite this difference, nothing stops an aspiring cryptocurrency developer to combine masternodes and Proof-of-Stake.
Proof-of-Stake is a dynamic algorithm, and the reward conditions may change over time. It’s important to track such changes to ensure the maximum investor’s success. To do so, one can simply use service.tech - a monitoring tool providing actual data in real time.