Want to know about masternodes? Read this

I know a lot of people have questions on masternodes and how they work, so here's a little introduction. If you learn something, throw me a merit point!

Masternodes in general are one tier of the DAO (decentralized autonomous organization) - providing a way for participants to execute governance related activities such as voting on proposals and changes in direction. The treasury, a complementary tier, funds the activities voted on by the masternodes. Masternodes are claimed by staking a balance of a fixed amount - normally quite a large amount, relative to the size of the overall supply - which is then unavailable for daily transactions.

Now to a large extent, this is a "proof of stake" system that allows for people with a sufficient amount of invested currency to have a significant vote, a say in the future of the currency. But the direct voting system is interesting, meaning that it turns into a reasonable equivalent of a meritocracy (although some might call it an oligarchy, as those with power/influence get more) - and many cryptocurrencies allow "shares" in a voting masternode. This is an especially interesting feature to many, as it allows those without the often high balance requirements to become a participating member in the governance of the project, as well as to enjoy a smaller passive income stream.

Why passive income? This isn't just paying people for having a vote. In many cases - specifically, those cryptocurrencies which are Dash-based - masternodes can perform some interesting activities, such as enabling features that would otherwise be too risky for the network to undertake without them. Instant Send and Private Send are two such functionalities, in that masternodes can put up a certain stake to cover the payment risk and/or act as a kind of proxy for the private send (thereby also enabling greater privacy/confidentiality). They increase overall stability and loyalty, and act as a control mechanism for potentially rogue-or-errant miners.So masternode owners are rewarded for this service to the community.

As a security mechanism, a scaling mechanism, and a feature-enabling mechanism, it is no wonder that masternodes are typically enabled to a large portion of the block rewards. In most cryptocurrencies which use masternodes, these rewards are somewhere between 35-45% of the block rewards, and are distributed (normally) in a kind of round-robin fashion in which a masternode is selected randomly each block from the subset of masternodes which have gone the longest without a reward. Economically, it can be a very sound investment, and in many new-and-rising cryptocurrencies, the paypack period on a masternode purchase is quite short - often in the realm of a few months.

Masternodes are evolving in many cryptocurrencies - they can be leveraged together with centralized mining pools, to complement and/or offset a variety of "proof of work" mining activities (basic heat miners acting as the third of the DAO tiers), block/reject unwanted or manipulated blocks, or even get used in smart contracts.