It’s a cryptocurrency full node or computer wallet that keeps the full copy of the blockchain in real-time, just like you have Bitcoin full nodes and is always up & running. But masternodes are considerably different in their functionality than normal nodes.
They are different because they perform several other functions apart from just keeping the full blockchain and relaying blocks/transactions.
By hosting a masternode, you become a node operator who enjoys the following benefits:
Passive income: Node operators split block rewards for completing ledger functions such as DirectSend, Instant Transactions, and Private Transactions. In order to do this, they must stake coins and host the server.
Investment strategy: Masternodes provide an opportunity to hedge the risk of investing in volatile crypto assets. They do this by providing predictable returns to node operators who are thus incentivized to run the network.
Governance rights: People running nodes for a cryptocurrency often get to vote on decisions pertaining to the network, such as with governance. So, while it’s a form of passive income, node operators may also enjoy being a part of the overall success of the network.
The very first masternode was rolled out by Dash. Today, Dash maintains a 58% market dominance over all other masternodes.
This type of passive income is different from mining cryptocurrencies in several ways. For one, the energy necessary to operate a node is less than with operating Bitcoin mining rigs. Additionally, node operators need less hardware and naturally, have lower computing costs than bitcoin miners.
Staking crypto on its own is different from operating a masternode as well. While you do stake coin when running a masternode, you’re also providing additional services to the network, above and beyond staking.
Operating a node is also a more passive way of investing than day trading. So those that may not have the time to take part in day trades, may prefer masternodes.
All in all, masternodes provide a crypto savings account that earns over time, yet are somewhat vulnerable to market volatility. Node operators help ensure the network is running optimally, provide services to the network, and receive payouts for hosting and running functions.