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Cold Staking vs. Masternodes – What’s the difference?

Cold Staking vs. Masternodes – What’s the difference?

One of the unique features of Callisto is the ability to earn interest on held funds through a process called cold staking. In essence, with cold staking you are lending your funds to the network on a short-term basis and rewarded with Callisto, proportionate to the period of time you stake your funds and the amount of CLO in the reward pool, funded by the Callisto treasury. The process is governed by a simple smart contract, where the required parameters are length of staking period and amount of Callisto to be staked. The exact return is determined by the period in which you are staking your funds, and the amount Callisto in the network staking fund at the time the reward is claimed (as opposed to when the contract is executed). The minimum staking period is one month, and this can be rolled over to continue collecting dividends on staked funds. This allows holders of Callisto to effortlessly earn a return on their holdings if they do not immediately need to liquidate their Callisto, and provides distinct advantages over running a master node, or similar fiat instruments, such as certificates of deposits or savings bonds (more on this later). Other blockchain networks offer similar returns through master nodes; a more technically involved proposal that requires the staker to host a master node on the network, typically requiring a relatively large investment both in terms of the underlying crypto and the hardware needed to host the master node.

Though running a master node certainly has its advantages (both to the network and the person hosting it), its barriers to entry put it beyond the reach of the average crypto enthusiast. Consider for example, Dash. You would need to deposit $278,000 worth of Dash (prices at the time of this writing) in order to run a master node on Dash’s network. Then, you would have to configure a server or a VPS to host the wallet on that master node and leave your stake on their network for a set period of time, typically one year. The master node holds a full copy of the blockchain, so would need to ensure there is adequate storage to hold the constantly expanding blockchain and maintain 24/7 uptime, so the master node can communicate with other nodes on the network; thus, it also requires a dedicated IP address. Once the master node is setup, the person hosting the node collects a percentage of the block rewards throughout the life of the master node. Master nodes were originally introduced to incentivize the decentralization and security of blockchain networks by ensuring the participants were invested in the going concern of the network and compensated adequately. Though every network is different, master nodes serve different functions. In general, they perform additional functions over a standard node that merely relays transactions to the blockchain, such as increasing the privacy and speed of transactions, enabling voting protocols and governance, and assisting in treasury functions. Though master nodes provide functional benefits to the network and financial benefits to the person hosting it, most are currently either too expensive for the average HODLer, too technical, or both. Due to these reasons, this makes running master node beyond the reach of the typical crypto investor, holder, speculator, miner, trader, or other crypto enthusiast.

Cold staking offers a simplified lending process, with shorter staking periods (Callisto’s starts at one month) and no minimum deposit amounts. Cold staking’s ease of use to the non-technical user provides anyone the opportunity to collect dividends on their holdings, simply by holding their Callisto and without the requisite hardware to run a master node. This encourages Callisto holders to hold their funds and invest in the Callisto network by locking up their CLO for short periods of time on the network, and rewards them for their participation with an adequate return where they may otherwise not be able to participate in a crypto lending facility. Now that the main differences between cold staking and master nodes are broadly understood, consider the theoretical similarities between cold staking and financial instruments, such as a certificate of deposit:

Let’s assume User1 acquires 10,000 CLO as a speculative position in November, 2018.

User1 has no immediate plans to liquidate their CLO and can commit to a minimum holding period of 4 months. Based on some initial projections, they can stake their entire balance for 4 months, and without purchasing a single CLO throughout the holding period, could claim their initial stake and reward in March, 2019 for 12,862* CLO. That amounts to a 29% return over a period of 4 months. This is quite attractive from an investment perspective, even assuming CLO price in a vacuum for the entire staking period. Now compare this to a traditional fiat currency investment of comparable terms and structure. User1 could invest $10,000 USD in a certificate of deposit and at current rates, be “guaranteed” an approximate annualized yield of 0.58%, which is the national average on a 1 year certificate of deposit. Since 4 month terms aren’t typically available, you would need to either accept a 30 day yield at approximately 0.08%, or lock up your funds for a period of 6 or 12 months. At the end of 12 months, User1 would earn a paltry $58 for lending their $10,000 to a financial institution. When taking into consideration inflation and income taxes, User1 is essentially guaranteed to LOSE money in real terms. If evaluated in parallel to cold staking, the opportunity cost is substantial. Thus, when evaluating investment alternatives in simplified terms, User1 is faced with an opportunity to enter into a cold staking protocol with more flexibility, lower risk, and a high probability of a superior return.

Back to cold staking. Though cold staking is generally more inclusive of the entire crypto community, not everyone in the crypto community supports the new protocol. Some miners in particular, do not like cold staking as it is perceived to dilute their returns from mining activities. The logic is, if interest (in the form of crypto) has to be paid to stakers, that payment is derived and allocated from rewards that were mined and thus earned by the miners that are confirming transactions and securing the network. The staker did nothing to “earn” a passive return, whereas the miners invested their time and money into hardware to ensure the underlying blockchain functions as expected, and their rewards are being distributed to those who didn’t make the same investments. Supporters of cold staking tend to disagree, and in some cases have branded cold staking as “the new mining”. As a miner myself, I personally am not in that camp. After all, what is to stop a miner from running master nodes on one network and cold staking on another (or potentially even both on the same network)? As it relates to staking, it seems to me that much of the discontent among the mining community is derived from the ongoing debate over proof of work algorithms vs. proof of stake algorithms. And in the case of Callisto, it runs on a proof of work algorithm (Dagger Hashimoto – Ethash), but employs a staking protocol, essentially bringing the two concepts together broadly into an effective and unprecedented hybrid model which engages the whole crypto community and incentivizes miners and HODLers alike. But for those who are less technically inclined, a decent understanding of the differences between master nodes and cold staking will help make informed decisions on how to allocate their capital.
So, in summary, what are the primary differences between cold staking and master nodes:

Cold staking:

  • Not necessary to run a node to engage in cold staking;
  • No minimum staking amount;
  • No hardware investment;
  • Stake and reward must be claimed;
  • Shorter staking periods;
  • Governed by simple smart contracts;
  • More inclusive;
  • Seamless.

Masternodes:

  • High minimum deposit amount;
  • Additional hardware investment requires a dedicated IP address;
  • Staker must configure and run a node;
  • Typically longer staking periods;
  • Rewards distributed to node wallet automatically;
  • Serve as a utility to the network that most users don’t understand;
  • More exclusive.

 

As illustrated, it should be fairly evident that cold staking offers more flexibility and lower risk than running a master node. Additionally, it engages all users of the crypto community willing to participate and doesn’t exclude anyone based their ability to run specific hardware or stake higher amounts. In the end, each individual participant in the crypto space will need to determine if cold staking is for them. No two scenarios are congruent and one’s goals, timeline, and technical abilities should be candidly evaluated before engaging in either master nodes or cold staking. For some, hosting master nodes may a better option. But cold staking is a game changer in crypto and provides an appealing incentive to hold your coins and eliminates the barriers to entry that are inherent in master nodes. I for one, will be cold staking my CLO in November.

*Calculations derived from this calculator: https://mining.alekseirubin.com/clostaking/?percent=50&invested=10000

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