Many experienced investors of crypto hope to run nodes to become a part of the network of their favourite cryptos. For the uninitiated or new crypto investor who may not know what a node is, you have come to the right place. Let us explain what a node means in the world of blockchain and cryptocurrencies.
First of all, before we explain what a node is, we need you to understand what a blockchain is. A blockchain is a distributed ledger containing each and every transaction on a network that is held together by nodes, or participants in the network. This ledger is being updated in real time by all the nodes concurrently.
Let us use Bitcoin (BTC) as an example to explain in greater detail.
As we know by now, Bitcoin is made up of a decentralized network of computers that run the Bitcoin software following the same set of rules called the proof-of-work (PoW) consensus mechanism to validate and broadcast transactions. This is done peer-to-peer without the need for a third-party intermediary, and these computers on the network are referred to as the nodes of the bitcoin blockchain.
In essence, a blockchain node simply means a device that plays a part in the larger cryptocurrency network. Nodes support the blockchain through validating and relaying transactions, while simultaneously updating an ever refreshing copy of the transaction history of the blockchain. There are many kinds of nodes:
- Full Nodes
These are called full nodes because they need to thoroughly verify that all of the rules of the network are followed. In the case of Bitcoin, full nodes must confirm that all transactions executed within the Bitcoin network are legitimate and prevent the double-spending issue, which means once processed, the same BTC cannot be spent again unless a new transaction is being initiated by that BTC’s new holder, ie there cannot be a replication of each BTC output. A full Bitcoin node has to download every single transaction that has ever been executed, including new transactions and all block headers, as well as store data on every unspent transaction output until it is spent. In addition to these, a full node has to keep a copy of the complete history of the whole blockchain, in this case, the Bitcoin blockchain. A full node can also send transactions.
As opposed to full nodes, lightweight nodes or light nodes only process small portions of the blockchain from processed transactions instead of the entire dataset. Light nodes only download essential data like block headers, which is the summary of a block containing a hash reference to the previous block, the mining time and the nonce (unique identifying number) of previous transactions. Crypto wallets are a type of light node.
3. Master Nodes
Master nodes only verify transactions sent by other nodes and do not send transactions themselves. Master nodes have other responsibilities like governance in voting events and executing protocol operations on the blockchain network. In that sense, they have a higher authority and greater responsibility than full nodes.
4. Complete Nodes (Mining Nodes or Staking Nodes)
Another important type of node is the complete node. These are blockchain nodes that consist of not only the entire history of the blockchain, they are also the only nodes that have the ability to add new blocks. There are two broad categories of complete nodes, the mining nodes and the staking nodes.
Blockchains using the PoS consensus mechanism use staking nodes to create new blocks, while blockchains like Bitcoin that use the PoW consensus mechanism have mining nodes that create new blocks. Both types of nodes are paid a reward for creating new blocks.
For the case of Bitcoin, while a full node does transaction validation, a mining node does what a full node does and on top of that, uses specialized computer hardware to solve complex mathematical problems to create a new block and upload new transactions to that new block. This is referred to as mining.
For their time and effort spent doing the computation, the miner nodes that successfully add a new block are rewarded the newly mined block of BTC.
A staking node under PoS works in essentially the same manner, except that instead of using computer hardware, they use software.
5. Other Nodes
There are other types of nodes that we will only explain briefly below.
Archival full nodes are authority nodes that control access to a blockchain. They are responsible for accepting incoming connections and uploading old blocks to other peers on the network.
Pruned full nodes have limited memory to hold data. They are full nodes and the whole blockchain is downloaded, but when they reach an upper limit, they delete the oldest blocks and only host the new blocks to keep within their memory capacity.
Functions of Nodes
Nodes accept or reject a particular transaction based on the validity of its digital signature and other aspects. While a miner adds a new block of transactions to the blockchain, a node is the one inspecting those transactions. When a node accepts a new block of transactions, it saves and stores it on top of the existing blocks, and then disseminates this new information to all other nodes on the blockchain that will need to update their records simultaneously. It is important for as many nodes as possible to constantly update and maintain the latest version of the blockchain as this makes the blocks resistant to manipulation. Hackers will need to attack every single block in the blockchain at the same time in order to change information on the blockchain, which is virtually impossible.
How Do Nodes work?
Transactions on a blockchain are packed into a data bundle that is called a block. Instead of having to confirm each transaction, miners will batch pending transactions into a new block and add them into the blockchain ledger.
Each block will have a hash pointer as a link to its preceding block, plus transaction data and a timestamp which is linked to that of another block in chronological order. The role of nodes is to verify each transaction within such a block.
Node vs Miner
As we have mentioned before, while a miner will definitely have to run a full node, a full node may not have to be a miner. The task of a node is to validate transactions within blocks, whereas the miner will need to use specialized equipment to solve complex mathematical problems in order to create a new block and upload new transactions into it.
Running a Node vs Running a Masternode
A blockchain usually has thousands of nodes active at the same time as anyone can run a node by downloading a blockchain’s transaction history. Many crypto and blockchain enthusiasts volunteer to run nodes of their favorite blockchain because they want to feel like a part of the project.
However, running a master node is much costlier. A master node operator, typically called a host, has to deposit a fairly large quantity of crypto as collateral because operating a master node gives the host certain power in the blockchain that may potentially be exploited. Putting up a collateral allows a way for the host to be penalized when he breaks the blockchain’s rules. A master node host’s interest rate is computed based on the amount of their collateral deposit.
Who can run a node?
Anyone with basic understanding of technology and programming can run a node as in general, a node is not complicated to set up and does not necessitate many resources. There are manuals available online to help one get started. For instance, anyone can download and run a blockchain wallet on their laptop or smartphone.
Nodes are imperative to a blockchain network because they assure the integrity of information on the blockchain while functioning in a decentralized manner.
Most blockchain networks use monetary incentives, such as mining or staking rewards to motivate users to operate complete nodes as complete nodes like mining nodes and staking nodes are costly to upkeep. However, most users volunteer to run light or full nodes of their favorite blockchains for free as it makes them feel like an important part of the blockchain.
Now that we have clarified what is a crypto node, let us answer some common questions.
Do crypto nodes make money?
Not all crypto nodes make money. Only mining and staking nodes earn block rewards while master nodes earn the host monetary rewards in the form of interest on their collateral.
How Much Is a Node In Crypto?
Most types of nodes are free to run, while a master node may require a large amount of crypto as collateral.
For instance, Dash is a popular blockchain that has a built-in master node functionality. A minimum of 1,000 DASH is required before anyone can become a Dash master node host. However, Dash currently pays about 11% interest on the collateral, which still makes it an attractive investment.
A Bitcoin node however, like the bitcoin core, is free to download and run, but running a mining node will require the investment of expensive hardware. A typical Bitcoin mining rig can cost upwards of $7,000 at current market prices with no guarantee of receiving block rewards due to intensive competition amongst Bitcoin miners who are using increasingly more powerful processors and grouping together more mining rigs to mine Bitcoin.
Is It Worth Running a Crypto Node?
It is still worth running a crypto node if you use the blockchain very often or are very concerned about the development of the blockchain.
You have a right to vote when there are significant changes in the blockchain that require the community to cast votes. Typically, one node represents one vote.
You also have full control over your crypto as opposed to having a third-party host it for you, especially in the case of forks, you can vote on which blockchain you want to follow and also, be awarded with new forked tokens immediately in your node in the event there is a fork in the network. Third-party intermediaries have no obligation to give you your share of the forked tokens.
Running your own full node also offers more privacy and anonymity than relying on third-party servers, who may expose your wallet address and compromise your privacy when processing your transactions.
Last but not least, running a node contributes to network security and integrity of your selected blockchain, ensuring that all its rules are strictly applied.
What Is a Node In Investment?
In the investment sense, running a node is similar to running a business of validating transactions on a blockchain in order to receive compensation. There will be capital involved in the setting up of such nodes, which is akin to the sunk cost of setting up a business, and operational costs like electrical bills one needs to consider.
Is Running a Node The Same As Mining?
No. Running a node is not the same as mining. Please read our explainer above which discusses the difference between a typical node and a mining node. A typical node is not able to mine unless it is a full node equipped with specialized mining hardware.
How Do I Run a Crypto Node?
To run a crypto node, you first need to download the software for that particular blockchain and copy the entire blockchain from other nodes and synchronize your node with the network. This is so that your node will be ready to start verifying new blocks of data. Downloading this amount of information may take up quite a lot of memory space in your computer and may not be practical for most users. An alternative way is to run nodes through a cloud service provider who will take over the storage and processing of transactions on the blockchain for you.