Episode 19 – DASH and Masternode Coins
If you happen to be a subscriber and remember back to Episode 12, which was titled “ROI Coin”, you will remember that episode as a sort of discovery of what I called a relatively “rare event” wherein the coin was released without a so-called ICO event, and which was released as a mineable coin that would grow organically over time. Well, since that podcast I’ve learned a few things – 1) these types of coins are not quite as rare as I made them out to be in that episode, and 2) these types of “non-ICO” coins, while they can certainly be characterized as such, are by no means all the same, and not even structured precisely in the same way. They share similarities, but there are important nuances, which you should be aware of as you explore this segment of the crypto currency space. And finally, just like a typical ICO, it is absolutely critical that you do every bit as much due diligence before investing a penny into any of these, however, the due diligence is rather different as you will see.
DASH – the ancestor of Masternode Coins
The other aspect of these types of coins is one that is, at least to me, very compelling for a number of reasons. I’m referring to the Masternode concept. First, when we are discussing masternodes, I think it’s only fair that we give credit where credit is due, and this would be to the DASH project that was, I believe, the pioneer of the masternode concept. And in keeping with this podast, we are going to aim for a foundational understanding. It should be understood that at the time of the DASH project, the number of full nodes running Bitcoin had decreased in what appeared to be a trend. Needless to say, the price of bitcoin had not yet spiked to astronomical levels, and so the point of the Masternode in DASH’s view was to provide more incentive for someone to run a full node. And so they invented the idea of a node wherein the node operator puts up a bond of collateral to operate the node. In the case of DASH, it was 1000 DASH tokens. Along with the collateral of the node, there comes a block reward. You are probably familiar with block rewards from Bitcoin – but in DASH there is a two-tiered networks, with the miners creating new blocks and the masternodes providing specific functions – in the case of DASH that would be PrivateSend, InstantSend and some governance functions – for instance, voting. In this type of two-tiered network, the block reward for every block is split between the masternodes and the miners – 45% and 45% respectively – with 10% going to a decentralized treasury system. In this way the masternode can be used as a sort of annuity that pays regularly, without sacrificing capital. And this capital – the 1000 DASH is never forfeited – but it is required to run the node – and if any of the coins are sold, then the masternode is removed from the network, and the rewards stop. So this collateral system provides two critical functions – it incentivizes participants to run a node – which as in all blockchains, means a healthy and secure network, and secondly, it provides a reduction in the volatility of the currency. The first thing we should take a moment to mention is the success of these ideas. First, as an investment. In January of 2015, which is about 36 months ago, a masternode for DASH cost, and was worth $1,262.00. On year later in January of 2016, it cost and was worth $14,447.00. One year after that – as of yesterday, it was worth 1.07 million dollars. By all accounts, this makes the run-up to Bitcoin seem pale in comparison. It’s successful in ways that other currencies are not. For instance, because of the 10% so-called “treasury” fund, there is a monthly budget of about $8million to fund various projects. And as you might imagine, the masternodes are the ones which vote on the allocation of project funding using this treasury. In this way, DASH is a community quite like any other in the crypto currency space.
Another thing to understand about DASH is that it is the ancestor, if you will, of many of the plethora of masternode coins that now appear on a weekly basis. So understand how DASH works and where it came from will help you understand most of the coins that we will discuss on this episode.
OK, so now you know understand what a masternode is, and I would venture to say that most of the people listening to this podcast are not going to be able to purchase a DASH masternode after listening to this episode, but you might be interested to know that the popularity of this class of coins that are springing up weekly are driven by the availability of masternodes, especially at early stages of the coins development.
Masternodes and Accessibility
Now before I talk in detail about the lifecyle of how these coins are released and work, I want to explain why I’m doing this episode and why I’m extremely interested in these coins – first, I will recognize now and later in this episode that in this space, just like the ICO space, there is a high risk profile and a fair number of outright scams. But there are also plenty of coins that are working out well for people – and here is why. With the recent actions of the SEC, we are starting to see two trends in Initial Coin Offerings – and I’m talking about the token sales now – – ICO’s – the first is a barring of United States investors – the second is a shift toward private sales, and SAFT-based agreements to accredited investors only and with high minimum investments. Just last week we saw the Bee Token sale to accredited investors with a 50 ETHER minimum. This is a trend – and this class of coin does not have that characteristic at all because with a rare exception of masternode auctions I’ll mention in a minute, these coins are not direct sales at all. They are accessible to just about anyone who has the interest to participate. And so for me, and I think you’ll agree after you hear my own personal story about one of these coins, that these coins represent a way for everyone to get involved with crypto-currency in a relatively low-risk way.
Before I talk about any specific coins, and before I tell my very own story of dipping a toe into this space, let me talk about the typical lifecycle of one of these coins:
- It starts out with an announcement on BitCoinTalk – and if you remember the ROI Coin announcement, that’s about how they go – it’s usually a POW/POS, which allows both miners and people to stake coins, with the promise of masternodes. The mining algorithm is established, which very often drives the audience of the miners. For instance, on a coin last week I read a comment like “Another scrypt coin for rich asic miners” which was most likely written by someone who is mining their GPU or maybe with a few of them. The other thing that is mentioned in the announcement is how many coins are pre-mined. This is usually 5% – if it’s more than that, it raised some eyebrows, and that’s one of the ways in which these coins are judged. A high pre-mine will attract criticism, and will cause suspicion, since the value of the stake of the original developer may provide too much temptation to continue the project if the value increases pretty quickly.
- The next step is for pools to feature the coin so that miners can create coins and introduce tokens into circulation. At this point, the concept “circulation”, however, doesn’t have much meaning because the coins are not on exchanges yet. But mining is important because it’s the only way that coins are generated. This step is fraught with peril, however. The biggest problem here can be when the developer makes a mistake and allows a large percentage of early coins to be mined by just a few or even one address. This was the near-fatal mistake of B3 coin, and you might be surprised that this was a mistake with DASH – where fully 10% of the entire supply of DASH coins was mined in the first two days, by just a few Amazon ECS customers who were mining in the very beginning. This was attributed, by the way, to a bug in the code that surfaced when they cloned the code from LiteCoin – and the developer offered to start completely over, but the community said – nope, don’t worry about it. Let’s move forward. Surprisingly, they did. Interestingly, the BitCoinWiki site has a page up named “Comparison of CryptoCurrenies” that states that because of this fact the Master Node algorithm for DASH has technically been in a failure node from the beginning. And it was just last week that I found an announcement page of one of these types of coins which was only a few pages – when I read all of the pages I discovered that the developer had made the same mistake, apologized all over himself, shut down the bitcointalk thread and said – sorry, I’ll try this again soon. But it’s not just bugs that are the problem – it’s the likes of NiceHash. What a coin needs at this early stage is a distributed set of miners if at all possible – the ideal situation would be many miners receiving about the same amount of reward. Of course, that’s impossible, even on the so-called ASIC resistant coins, because there are plenty of people that have phenomenal GPU rigs that have and insane amount of hash – but this is a real problem, because if just a few addresses obtain all of the blocks, miners will get discouraged pretty quickly. The trick in this stage is therefore to attract a lot of miners without getting blasted by the big guys.
- The next natural step – and by the way, not all of these steps are completely linear – they can be done in parallel – is to introduce masternodes. Masternodes usually have a high number of coins that must be used as collateral – 1,000 usually being the minimum, but some coins have as many as 10,000 coins. This ensures scarcity and also provides value. This step is usually conducted in parallel with the next stage I mention, which is getting listed on exchanges, so that people don’t just have to mine for masternodes – because frankly, that can take a long time to mine 1000 or more coins, depending on your equipment. Generally, this step consists of releasing code and instructions for installing a masternode, but on the Lizus Discord channel last week I noticed that the Lizus team was auctioning off masternodes – well, not precisely that – I have to be careful because they came under fire for this – so I’ll be very specific – they were auctioning off blocks of 1000 coins (a masternode required 5000) which could be used to create a masternode. And the price of these blocks of coins, if you did actually want to run a masternode for that coin, was about $65,000 for a masternode at the price of BitCoin on that day I saw the auctions. This, by the way, is unusual as far as I can tell, and to be honest, I think it’s a bit unfortunate, because a great benefit of these coins is the fact that they are accessible to those who don’t have $50,000 to drop on a sketchy investment. I can only hope that this doesn’t become a trend for all of these coins – although, even if it does, there are way to participate through a shared masternode service which I’ll explain in a moment.
- The next step – which as I said is actually a parallel step – is getting listed on an exchange. This is pretty much critical to the success of a coin, because it allows people to participate and construct master nodes without having to mine for coins. The challenge here is two fold – first, the big exchanges, like BitThumb, and Bitfinex and the other enormous exchanges will not list these new coins. And there are not a lot of stable minor exchanges that will list these coins. Those that are relatively stable, like Cryptopia, charge high fees to list the coins. To give you an idea, two weeks ago I was on a Discord server of a coin that what complaining that Cryptopia was gauging the coins by charging 5 Bitcoin to list their coin – but a week later the price had risen to 7 BTC, and three days ago I heard the figure 10 BTC – and yesterday, and this may be a rumor – I heard that they raised the listing fee to 30 BTC. Just to be clear, 10 BTC is about $140,000 right now. Thirty approaches half a million dollars. That’s a listing fee. And when asked why they were conducting these 1000 coin auctions last week, Lizus explained that they needed the money to be listed on exchanges. But getting on an exchange is a life-or-death milestone for a coin. I would say that if you go poking around you’d find a graveyard of coins that never quite made it an exchange. In fact, you don’t even have to go far – just go to deadcoins.com and you’ll see what I mean.
- For masternode coins, a critical step is to get listed on the masternode sites. There are about a half dozen main ones – masternodes.pro, masternodes.online, mnrank.com to name a few. This is very, very important because those sites list the return on investment, which is the primary reason for participants to get involved – the ROI. Speaking of ROI – it’s important to understand that in the beginning of most coins, the ROI tends to be large, and that’s mainly to attract attention as well as to establish strong incentive to create a healthy network of masternodes. If you remember by episode about B3, this is a bit of a delicate dance here. You want a high ROI to attract masternodes and participants, but you don’t want it to be so high so as to create massive inflation to destroy the value of the token. And you should understand that the ROI will naturally decrease over time for these. Thus, when we talk about the strategy of participating in this space later in this episode, remember that fact. These masternode site listings, however, are almost as important as exchange listings when it comes to the success of this type of coin.
- The next milestone after the exchanges is to get listed on coinsmarkets.com. This happens after a certain amount of trading volume, so this is an obvious linear step in that a coin must be listed on an exchange in order for coinsmarket to list them. This is a significant milestone and you’ll see the result when I tell my little story coming up.
So, those are the high-level steps – if a coin can make it through these steps, there is a high likelihood that the coin will last some time – long enough, perhaps, for you to achieve a return on your investment.
How i turned $150 into $4000 in Three Weeks
Ok, so now to my story. This story is completely factual, with no exaggeration – no made up numbers. This is precisely how it played out. First, I’ll explain that I’ve been eyeing this space since the ROI coin and B3 episodes, which aired in November. At that time, there were about six or seven masternodes that were going for about $3 – $5,000 – which, by the way, are now work multiples of that. Coins like INNOVA , VIVO and the like. And in the last week of December, after I had returned home from outside the country, I was ready to give it a shot. But I was still a little bit skeptical, especially after B3, so I decided to risk a much smaller amount. And fortunately, you can do that.
Ghostminer and the Shared Masternode Service
I first invested this by finding what is known as a Shared Masternode Service. The one I found was by Ghostminer. A shared masternode service is simply someone who collects enough tokens for a given coin for a masternode, fires up the masternode and then pays out according to the percentage that each participant invested. In this case, Ghostminer collects a 5% fee and pays daily. And so using this service I sent 50 Polis tokens to Ghostminer for a 1/20 seat of a 1000 masternode for Polis on December 27, 2017. At the time the price of Polis was about $3.00, and a masternode was $3,000. My investment was about $150. Then, between 12/29 and yesterday, I received an average of 3.65 tokens per day in return for my “stake.” So now I have the original 50 tokens (well, I don’t have them – the Ghostminer masternode service does), plus a little over 49 in my own wallet. So that’s about 99 coins. But two or three days ago they were listed on Coinmarketcap (stage 5 of the journey above) and now the price is $49.80 as of this moment – at least shown there. The only exchange that works right now for them is stocks.exchange , and I can tell you that this exchange barely works – but anyway, if I wanted to buy some now it would certainly cost me about $49, one way or another. That makes my original investment of $150 on 12/27/18 worth, today, about $4,900. At this point, I’m free to either send Ghostminer the 50 coins I have earned for a second seat of Polis – OR .. and this is probably what I will do – I can instead keep the 50 coins on my shared seat, and receive the 2 or 3 each day, and trade the other 50 coins for a seat on a newer, possibly less expensive coin in the hopes of repeating this. This is how people use Share Hosting services to work their way up the chain of masternode investment. Naturally, I’m also free to cash in all of the coins and take US Dollars. But as for me, I don’t think I’ll do that just yet. The most important part is to make sure to find a shared masternode service as honest and professional as Ghostminer’s. You can find a link to the Discord channel on ico41.com on the post that is associated with this episode.
Now remember – this started with about $150. So this is what I mean that along with the concept of a Shared Masternode service, this is the type of crypto currency market that allows almost everyone to participate.
Buyer Beware and Due Diligence
But I want to once again emphasize that this space has its shares of scammers as well. First, the shared masternode service is very important – I have found Ghostminer to be absolutely trustworthy, and since everything is conducted in the open on Discord – every payout is announced – I can tell you that many multiples of transactions have been handled without any complaints from this service. So be sure to find someone as trustworthy as Ghostminer if you enter this space using a shared service.
Secondly, you need to read every post on the Bitcointalk Announcement for the coin, and join the Discord and Telegram and read and read and read. You can visit the website, but that source will not be as useful as listening to people interact and reading the community postings. There will most likely not be a Team to look at, or a company – there will just be a developer. And I have seen coins where the developer ran away from the project after people invested in masternodes, so be very careful in this space.
Thirdly, you must watch this carefully – there will come a time when the masternode will not pay like it did in the beginning, and then you have to decide whether you want to cash out. Also, the valuations of these coins have very often been described as pump and dump. Therefore, you may wish to take that into consideration in the timing of your investing.
Fourth – to choose the coin, head over to masternodes.online and first sort by ROI. Then look carefully at the number of masternodes, the return on investment, the number of coins for a masternode, how long the coin has been around – and then if you are using a shared Service like Ghostminer’s, make sure the coin you are interested in is supported by the service. Remember to do all your due diligence, especially if you are spending a significant amount – which, as we all know, is relative. As of today, the top coins on that site are ARTAX, POLIS, which I see has fallen about 14% in a day. Then there’s NUMUS and MUCOIN. Of course, next week or the week after that we will see a whole new list, I’m pretty sure.
Fifth — this is not easy. There is nothing easy about any of this. I may have made my experience with Polis sound easy, but it wasn’t – be prepared to deal with Wallet issues, If you are technical enough and have the money and you want to run your own masternode, be prepared for a lot of technical steps and possibly troubleshooting. If you are purchasing the coins, be prepared for massive exchange issues – there have been nightmares with exchanges lately. Cryptopia was shut down to new registrations because they had reached their limit – coinsmarkets – an important exchange for these small coins, has been completely down for about three weeks now – another new Russian exchange called stocks.exchange is having huge problems and has been labeled a scam. So getting these coins may not be as easy as you might think. Many people characterize this as passive income – I personally don’t see it that way, but that could be because I’m mainly a hands-on kind of person.