First things first. If you haven't yet, you might want to start with our article on whether masternodes are worthy your time and investment and even our latest list of 11 fastest growing masternodes this year.
You might have heard the buzz about masternode ROI. But just because the return on investment of a masternode coin is highest or the best in the market, does't mean it is the best masternode you should be choosing. The "health" of a masternode is weighed over a number of many other factors. Or there are more things you might need to know, in addition to ROI, when investing in masternodes. That's what am trying to say.
So what are the other factors you should be evaluating, or other things you should know, to determine the best masternode to go for?
1. Return On Investment (ROI)
Let's start looking at ROI. What is it? The return on investment is the percentage of return that a node is predicted to pay out in 12 months. But it is actually calculated in days. A ROI of 100% gives back your initial investment back within 12 months and a 1000% may give back the invested amount in only 1.2 months or earn you ten times of investment within 12 months. ROI tends to drop with the age of the blockchain.
Looking at websites such as masternode.online, masternode.Pro and masternode.live and others, you are able to track a number of things about masternodes including the return on investment for different masternode coins. However, those statistics regarding the weekly, monthly and yearly ROI change from minute to another and aren't reliable because of the volatility nature of crypto.
Different coins will have different ROI, which depends on other factors such as the number of nodes on the network. In all cases, ROI drops as more people come in and as more nodes get to run. Take note that ROI could be very high because there are only a few nodes, which means the coin may not be as sustainable in the long term or may just be very new (compared to a masternode coin or project with a higher number of nodes on its network). If it is very new and with high interest in the community, then it means it could be a great coin to buy, but note that ROI could drop, which makes it only best for short term speculation. You should exit as the ROI drops and when the price is at roof probably.
Note the temptation for most investors is actually to buy most MNs when the ROI is highest but as many people will come in because of the high interest it generates -- and the many people looking to get quick cash, the ROI will finally drop.
The other important factor for which you should evaluate ROI alongside is the use case. If early investors or every investor sells their coin at peak time to avoid loses, the price will eventually tank and hyperinflation results if there are so much in circulation. The team may get into the temptation of adjusting the reward structure. The coin has a higher chance of survival if it has a good use case or utility, otherwise it may end.
2. Use case of the project
A use case can be taken to mean the actual application of blockchain tech by the masternode project or team or the real world problem they are solving with their innovation say applying blockchain in supply chain. It can also be taken to mean an innovation in the way masternodes are run, in that case a masternode being a use case for the project.
Some masternodes projects, for instance, innovate the way masternodes are installed and run or innovate the protocols underlying masternodes such as one-click masternodes, governance etc and then add extra services. Others combine the two, meaning they innovate the underlying protocol and at the same time have a backbone sort of an economy through a host of features such as having a marketplace to allow trading of crypto or trading of crypto-related goods and services, or say applying blockchain in a real-world problem such as in supply chain.
Although anyone buying masternodes should not be deceived by promises, a use case or a working product with real crypto or world use case can determine future success or failure of the project.
Today, some of the many applications for masternodes include facilitating instant and private transactions. Others facilitate atomic swaps and cross-blockchain transactions and operations for other platforms including other crypto projects. Some of the other use cases for masternodes today include decentralized marketplaces that integrated into the wallet platforms. Other use cases include integrating financial, gaming, and social platforms into wallets to facilitate social participation into the network or project.
The volume of any cryptocurrency coin is very important in determining market dynamics and movements alongside circulating supply and market capitalization. The volume is the amount or number of coins that have been trading or that have already traded in the last 24 hours. It therefore shows the number of people that are buying and selling the coin. Usually, low volumes relate to low activity and vice versa.
By following the 30-day, 7-day and 24-hr volume, you are able to determine whether it is following a norm or just an aberration. In some way, a sustained high volume shows that a huge number of people are backing the project and supporting its ideas, actions or ideologies. Some heavy trading in a coin in the last 24-hr might tell that there is some huge support in a latest decision, announcement or may be move by the project. A heavy volume may keep propelling the price higher.
You are also able to break down the volume data and check the exchanges on which the coin has huge activity, and geographically where it has most activity.
4. Type of governance, or Decentralized system of governance
The role of the decentralized system of governance is to manage, fund, maintain and expand the project. It is one of the most important challenges any crypto group will face when building a project. Since it may determine investment and budget allocations in the project, it largely determines the future direction and success of the crypto project. A governance system could mean future splits, etc. A good example is the Dash's decentralized governance system. Of course, different crypto masternode projects will use different governance systems to survive.
Unlike with not-for-profit crypto foundation, a decentralized system of governnance is included into the protocol and relates to investors. For instance, a decentralized management system on Dash is based on masternode voting mechanism.
Masternodes use proof of stake and you might want to familiarize yourself with the delegated proof of stake as a more efficient PoS mechanisms, which rely on a reputation system. Community members vote for super representatives to secure network and super representatives rewarded by validating transactions for the next block.
In Dash, for instance, a 100% decentralized system is powered by masternodes with budgets set and paid directly from the blockchain. Compared to the not-for-profit foundation system model built by some crypto projects, this model can it can survive early adopter i.e. if early adopters sell coins to new operators, the new are able to set up and acquire rights to vote on the budgets and projects.
The network is capable of sustaining itself without depending on specific actors.
Divi masternodes project allow anyone with 10,000 coins on a staking wallet or a masternode wallet to vote, but power to determine the future of the ecosystem depends on the number of DIVI a user is holding. It also has a Divi Foundation which runs the project until the community grows to demonstrate ability to proceed with project and vote for new foundation council members to replace those that leave and eventually being able to allow for voting of major of council seats. The community will be able to vote on fee amounts, inflation rates, blockchain metrics and features. Although the first proposals for funding are/were put up by Divi founders for voting based on recommendations by the tech team, the community members later(or already are) will be able to bring up proposals and vote them for funding.
The PIVX masternode governance is known as community designed governance. DAO Governance follows the same process of submitting a proposal, and Master Node Owners voting to accept/reject the proposal. This happens at Super Block which is roughly once per month. Manifestor governance is a type of proposal which rarely may happen and will require a higher amount of participation (with metrics to be decided later) during the voting process. Even those not participating in voting will be informed of the issues that are to be voted.
Treasury governance is another type of proposal and are the most common. They influence allocation of funds in the monthly treasury budget. They can include issues such as funding overhead costs for servers, or Google Apps, advertising, launching of a justified business etc. Protocol governance, the other type of proposal, are zero cost and used to change the code base or protocol of or priorities of change to, the PIVX system. It may become a separate Treasury Governance proposal submitted after the Protocol Governance proposal has been accepted.
At least a good governance system for a masternode should as much as possible avoid centralization and allow for fair participation in the voting on governance proposals on the blockchain through consensus.
Masternodes also get to collectively determine core policies such as fee structures, incentives and rewards.
Cryptocurrency projects, among them being masternodes, are based on decentralized models and such require a network of users and operators to survive. A size-able community not only maintains a huge masternode coin volume to provide a good market for anyone to trade the masternodes when they want, but also sustains the ecosystem and maintains the project whether it means by helping come up with new ideas or voting for better proposals that will see the project grow.
A good size-able crypto project community offers good support for the project ideas including raising sufficient money in an ICO, participating in mining or generating new coins, facilitate testing of the crypto ideas on testnets etc, and to discuss matters relating to the project. Even today, the success of a crypto project is related to its community in a way because one that has generated huge amount of interest is expected to have a larger group than one that hasn't.
These communities are organizing themselves and interacting continually on social media; telegram, Discord, Reddit, BitcoinTalk, Twitter, Facebook, Medium etc. so you should join these channels if willing to know the ins of the crypto. What's more? You get to talk to the people running the project directly, know what's happening on a minute basis regarding the project, and even get support for set up and other issues you might have or take a sell or buy action depending on announcement and news on the groups.
6. Masternode tools
The various tools you need to invest in masternodes vary; some websites such as masternode.online, masternode.Pro and masternode.live will provide you with information such as the masternodes that are currently online, the number of coins you need to run a masternode for a particular masternode, the value of a given masternode coin, the return on investment (say weekly, monthly and yearly). They also provide details such as how many nodes of that masternode are currently on the network, the current price of the masternode coin, change in price in a given period, wallet status, the volume of the masternode coins, and other factors.
Other tools relate to what you might require in order to run the particular masternode e.g. the machine specs. Of course, compared to ordinary nodes, many masternodes will require a Virtual Private Server hosting and most that have pre-built binaries will still need 1 vCPU core, 1 GB of RAM memory, 25 GB of hard drive space a high speed internet connection, and at least a transfer of 500 GB per month. In some cases, you may be able to run with a home computer and a Raspberry Pi machine with additional cost-saving benefits, but then there may be technicalities that you may need to keep in check.
Also, running a masternode may also require ordinary analysis tools for a coin and its price movements.
7. Project risk
Normal business risks in crypto investments apply. Any investment in a crypto or non-crypto project constitutes a some level of risk. The rule of thumb in investing in any crypto project is widely known: invest what you can afford to lose to mean never invest more than you can live without. This takes care of issues such as if you buy a masternode coin and the price drops later.
The good thing with masternode coins is that they have a lower risk compared to non-masternode coins or normal nodes. There also is a promise of earning some rewards over time while the masternode runs. You also get to participating in the governance, through voting, and allowing for transactions with enhanced privacy.
New projects also always carry some form of risks than tested projects, depending on how they are able to sustain themselves over time; the size of community they are able to attract, the market trends, the price movements, and how they are managed by the management team to be able to survive the challenges of running the business.
Risks may also be higher for scam projects and one should perform due diligence to avoid scams in crypto projects.
8. Entry/exit time
New projects may carry higher risks than tested projects, but remember they might make the best for those targeting short term gains. Usually, everyone knows that ICO coins are mostly undervalued. It all about gauging the growth potential of a genuine masternode coin ICO or buying in early and exiting the position before its late.
8. The due deligence
As a warning, crypto is full of scams. Everyone should take a point to research whether the project is viable and existent or not.
You might want to look at this article about masternode scams, this other one about the seven crypto scams you need to know and how to avoid them.