What are Masternodes?

A Masternode is like a server which performs a specific, useful function or functions for a cryptocurrency. This is usually a separate function from the mining or staking nodes. A Masternode operator is providing a service for users of a cryptocurrency by running software which performs whatever useful function has been built into it. To run a Masternode the operator is required to provide collateral in the cryptocurrency in question. For this upfront investment and as a reward for providing the service offered by the Masternode they receive an income. This income usually comes from transaction fees produced when the service provided by the Masternode is used by users of the cryptocurrency. For example, Stratis has Masternodes which act as Tumblers to provide a tumbling service through the Breeze Privacy Protocol. This offers users the chance to introduce privacy with regards to their activity and fungibility to their BTC. In order to operate a Masternode, the operator must have 250,000 STRAT and keep the 250,000 STRAT in the registered wallet and not move it plus 5 BTC to perform the tumbling service itself. The Masternode operators are rewarded with the transaction fees generated during the tumbling. This fee can be set by the Masternode operator, but it defaults to 1.55%.

A Masternode needs a function to fulfil and an economic incentive for its operation. Many cryptocurrencies choose to offer Masternodes both as a way of providing services to their users and as a way of inducing scarcity to the coin.