A large portion of this was compiled by @jakiman. To read the full paper, please visit here.
What is a Masternode?
Masternodes are nodes running the same wallet software on the same blockchain to provide extra services to the network. These services include:
- Anonymization increased privacy of transactions
- Instant transactions
- A decentralized governance
- A decentralized budgeting system
- Immutable proposal and voting systems.
For providing such services, masternodes are also paid a certain portion of reward for each block. This can serve as a passive income to the masternode owners minus their running cost.
What Makes PIVX Masternodes Unique?
The majority of crypto currencies that make use of masternodes, split their block reward per block equally between the mining and masternode distribution mechanisms. The intended fairness of this reward distribution can be subverted by the growth of masternodes held by large investors without limits leading to potential centralization of the budgeting system much like having a majority shareholder in a company. The additional benefits of masternodes can lead to less number of users conducting Proof of Stake (PoS) mining activities and thus lowering the security of the PoS network.
Masternodes do provide a valuable service and should be rewarded for that service, but our aim here is not to reward them way beyond the extra value they provide. For we believe that doing so disproportionately benefits masternode owners above and beyond other users of the system and ultimately leads to a greater degree of centralization.
PIVX See-Saw Mechanism
To promote an even ratio between staking nodes and masternodes in the network, the PIVX team has developed a variable Seesaw Reward Balance System that dynamically adjusts its block reward size between masternodes and staking nodes.
Each PIVX PoS block reward is split with 10% dedicated to the budgeting system and 90% dedicated to both the masternodes and stake mining reward. The reward portion is further split dynamically via the Seesaw Reward Balance System between masternodes and staking nodes.
The logic is simple in its roots. The higher the masternode count, the smaller the reward portion of each PoS block that will be paid out to the masternodes and the larger the reward portion for staking nodes. Conversely, when the masternode count falls, the masternode reward portion is increased and the staking node reward portion decreased.
The PoS block reward starts with a ratio of 9 to 1 towards masternodes when the amount of coins locked to masternodes is lower than 1% of the total coin supply.
But as the number of coins locked to masternodes go above 41.5% of the total PIVX coin supply, the block reward amount will shift with more than 50% of the block reward going to staking nodes. This has the effect of making it less attractive to provision more masternodes as it has the potential to significantly lower its profitability compared to staking that has less upkeep cost.
This threshold was selected as it would allow a strong network of profitable masternodes while creating incentive for approx. 60% of the total coin supply to be available for staking to secure the network and to maintain liquidity.
Another intended benefit and goal of the Seesaw Reward Balance System is to ensure that it is more profitable for users running masternodes than it would be to stake the equal number of coins, under the normal circumstances of being below the equilibrium threshold. The reason behind this is due to the extra cost, risk and time associated with maintaining the masternodes are greater than staking alone.
How Much Can I Earn?
The following graph shows the block reward amount (Y axis) for the masternodes (RED) and staking nodes (BLUE) against the percentage of total coin supply locked by masternodes (X axis) starting from block 648,000 (mid-May 2017) where each block rewards is fixed at 5 PIV.
The following graph shows the theoretical annual percentage return starting from block 648,000 where each block is fixed at 5 PIV with an interval of 60 seconds. (1440 blocks a day)
The RED line represents the return of masternodes when there is zero upkeep cost per masternode and GREEN line is the logical masternode return curve on a hypothetical scenario where there is an annual upkeep cost of $300 per masternode with the price of each PIV at $1 USD.
The BLUE line represents the % return per year calculation of staking nodes is based on the assumption that all remaining coins are being staked. So the actual return rate for staking nodes may vary depending on how many are being staked at any given point in time.