What are nodes in cryptocurrencies and why are they needed

Those who take their first steps in the world of cryptocurrencies are initially faced with a lot of incomprehensible terms. It is important to study them in order to take advantage of the opportunities for new digital assets.

The editors of GeekMyGadget found out what nodes are in cryptocurrencies, what functions they perform, and how to make money on nodes.

What are nodes in cryptocurrencies?

In simple words, a node is any computer in the network of the blockchain system. But using your home PC as it is not very convenient. Firstly, you need 24/7 access to the Internet, and secondly, a reliable uninterruptible power supply. Therefore, it is more correct to say that a node is a server with special software that is connected to the cryptocurrency blockchain network.

What is a node?
What is a node?

The term comes from the English word nodus, which means knot. Because of this, nodes are also called network nodes. Network nodes are the backbone of every blockchain. They constantly “communicate” with each other using the P2P protocol, or peer-to-peer, which means “from equal to equal”. This allows you to create a decentralized network in which there are no dedicated servers and no central governing body.

Functions of nodes in the blockchain

Any cryptocurrency system cannot exist without nodes. But in order to better understand their purpose, you need to remember how the blockchain works. In literal translation, this is a continuous chain of blocks, each of which contains a certain action. The chain cannot be broken, since each subsequent block contains part of the data from the previous one. 

Whenever a transaction occurs on the blockchain, a record of it is sent to every node in the network. One block can store millions of transactions. Therefore, it is almost impossible to falsify the data. After all, for this, you will have to simultaneously change records on thousands of nodes. And the task of network nodes is to perform their verification and confirmation.

Thus, on the one hand, nodes are the guardians of the blockchain, which ensure its security. On the other hand, there are accountants who fulfill the main principle: do the job – get rewarded. Depending on their role, they can accept or reject transactions, encrypt and store information in a block, and communicate with other blocks. The more nodes in the network, the more difficult it is to “deceive” it and the higher its stability.

Types and features of nodes

Network nodes have different functionality. They are divided into full and lightweight, masternodes, mining nodes, and staking nodes. Masternodes exist only in those networks where it is provided for by their structure. In Bitcoin, for example, they are not. However, they exist in DashNEMSyscoinNodetrade, and many other cryptocurrencies.

“Why did it happen?” – you ask. The fact is that Bitcoin is impersonal, but not anonymous. Although it is not known who owns a particular address, the relationship between addresses in theory can be traced. Therefore, it is worth highlighting one address, for example, paying for air tickets from it, and you can get all your addresses along the chain and find out all the transfers.

The solution to this problem was found by Arizona programmer Evan Duffield. He proposed introducing a new class of devices into the blockchain network – mixers. The idea is that the sender of money transfers them not directly to the recipient, but to the mixer node. She splits the payment into random parts, mixes it with the money of other clients, and sends it to the recipient on her own behalf. As a result, it is very difficult to understand who translated what and to whom.

Duffield offered the working code to Bitcoin developers but did not meet with their support. Then Evan embodied his idea in the first anonymous cryptocurrency, which he called Darkcoin, and later renamed Dash. This is how new nodes appeared in cryptocurrencies, which we call masternodes.

Blockchain Nodes: An In-Depth Guide - 101 Blockchains

Types of nodes

    • Full Nodes – form the basis of the blockchain and contain information about each block since the platform’s inception. For example, the full nodes of the Bitcoin network contain the entire BTC blockchain, which weighs about 350 GB. It takes a lot of processing power to process this amount of data.
      In addition, a full node must be connected to the network around the clock, otherwise, the data of its archive will no longer be relevant. It is full nodes that verify blocks, transactions, and digital signatures. In case of violation of the rules, they reject the operation, which ensures the security of the network.
    • Light Nodes are wallets that do not download the entire chain of blocks, but only part of it. In contrast to full nodes, they cannot independently verify the legitimacy of transactions and blocks. To check the data, they have to contact the full nodes of the network.
    • Masternodes are similar to full nodes, but unlike the latter, they perform additional functions and generate income. Their purpose is to keep a record of transactions, validate blocks, and ensure user anonymity. This is achieved by splitting the transaction into several parts and forwarding between users.
      As a rule, in order to launch a masternode, they require a certain amount of money to be locked up as collateral. For example, for the Dash cryptocurrency, the minimum deposit is 1000 DashCoins at a price of $39 per coin. At the same time, the masternode of the Dash currency can bring the owner up to $900 monthly.
    • Mining Nodes – can be full or lightweight, but always work in cryptocurrencies based on the Proof-of-Work algorithm, which means “proof of work”. The miner’s equipment solves the cryptographic problem that the blockchain puts in front of him. Its solution allows you to add a new block to the blockchain chain.
      The proof of the work done is the unique value of the code – the hash. When the miner finds it, it sends the hash to other network nodes for verification. Other participants verify the hash for compliance with the task. And only after that, the miner can add a new block to the blockchain and receive a reward for this.
    • Staking Nodes are full nodes in cryptocurrencies with the Proof-of-Stake algorithm, or “proof of ownership”. They are rewarded not for complex calculations, like mining nodes, but for owning a certain amount in the blockchain currency. Like other nodes, they verify transactions and verify new blocks. In addition, they allow you to earn with the help of the so-called staking, which we will discuss below.

How to install a full Bitcoin node?

Let’s say you decide to install a full node. First, you need to open the bitcoin.org website and download the Bitcoin Core client. The client itself weighs only 17 MB. But the ad on the download page immediately warns that it is advisable to check your connection speed and disk space, as synchronization will take time and lead to a large amount of data downloading.

Bitcoin Core Download Page
Bitcoin Core Download Page

In order for a full node to be connected to the network, an open port 8333 and a broadband internet connection are required. The volume of traffic for full nodes is usually 20 GB or more per month. And when you first start the node – about 350 GB. More detailed instructions for a system running Windows 10 can be found here. We add that a full node can be deployed both on a regular personal computer and on a virtual server. You can also purchase a dedicated physical device.

Do node owners get paid for their work?

It depends on the choice of cryptocurrency. In Bitcoin, for example, only miners earn. In cryptocurrencies like Dash and NEM, owners of masternodes are rewarded. But for this, you need to buy pledge coins, which not all novice traders have.

This problem is partly solved by the so-called masternode hosting. They collect money from many users, raise a masternode on them, and divide the income according to the invested funds. Examples of such hosting are Node40MasternodeMeDashmasternode.

Masternode investment comparison
Masternode investment comparison

In addition, there are a number of blockchains that pay for the work of full nodes. Participation in them may be of interest to beginners since this is actually mining without much investment and risk. Here is a partial list of such projects: IDENACyberArdorNXT, and Pocket Network.

Why run your own full node if you can’t make money from it?

  1. Reliability. Full nodes are run by enthusiasts who want the network to grow and develop. This increases the reliability of the entire chain. After all, the more nodes, the more difficult it is for attackers to deceive the network.
  2. Security. Those who conduct many transactions and take care of their security are interested in this. By entrusting the verification of their transactions to someone else, they are minimally, but still risky. And having your own full node gives you complete control over your personal finances.
  3. Prestige. Full node owners can vote on significant changes to the blockchain. Sometimes they result in a hard fork, in which two coins with different characteristics appear instead of one. For example, Bitcoin Cash separated from Bitcoin on August 1, 2017.

Incomplete nodes are useless? Why are they needed then?

Incomplete nodes have an important advantage: they take up less space. You don’t need a dedicated server to install them, a smartphone is enough. As a rule, incomplete nodes perform the function of transferring funds. At the same time, they receive information from full nodes. So the wallet on your smartphone is also an incomplete node.

I opened the web interface of some crypto service and entered my wallet. Did I run a node?

Full nodes
Full nodes

Only if the application is installed on a PC or smartphone. In the case of web services, the node is launched on the side of its server, and you only see information from it on the screen.

Do miners also have their own nodes?

Without a node, mining would not be possible. After all, how to calculate new blocks of the blockchain chain if you do not know the current state of this chain and the parameters of the next block? You can get this data from the full node, which stores the entire transaction archive. Therefore, all miners are either full or lightweight nodes. The former learn the current state of the chain from their archive. And the latter has to receive information from other full nodes in the cryptonet.

How to make money on nodes?

Since April 2022, the profitability of mining Bitcoin, Ethereum, and other coins has been steadily declining following their rate. On top of that, on September 15, a historic “merger” took place on the Ethereum platform network. One of the most popular cryptocurrencies switched to the Proof-of-Stake algorithm, which made it almost impossible to mine on video cards.

As of October 2022, most Ethereum miners had to switch to other tokens, which increased competition and made the work of crypto miners unprofitable. Under these conditions, it is worth paying attention to alternative ways of earning on the “crypto”. These include, for example, testnets – draft versions of cryptocurrency projects, for testing of which developers pay everyone.

Smartphone with Crypto wallet app
Smartphone with Crypto wallet app

With their help, project authors check the system performance, find weaknesses in it and make adjustments to the program code. And users receive real money or project tokens. At the same time, nothing is required of them, except for effort and time. An example is the testnet of the Uniswap crypto exchange, whose participants received 5,000 UNI coins each. Today it is about $28,000.

Another replacement for conventional mining is staking, or getting passive income from storing crypto coins. It is possible in blockchains with the Proof of Stake algorithm, or “share confirmation”, such as, for example, Ethereum 2.0BitDAOCardanoTezos, and others. The user installs special software and synchronizes with the cryptocurrency blockchain. After that, it remains to put a certain amount of coins of this currency into the wallet, for the storage of which the system charges a reward.

Best cryptocurrencies for staking
Best cryptocurrencies for staking

The more coins in the wallet, the greater the reward. True, as in the case of masternodes, serious investments will be required. So creating a staking node in the Tezos blockchain platform costs about $15,000. Exit in associations of investors, which are called pools. They offer different, sometimes quite attractive, percentages for using the funds in their staking nodes.

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