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During the course of the Gold Rush, some 300,000 people came from far and wide to California with the dream of gaining riches beyond their wildest dreams.
At the start, it was easy to strike gold. The streams and rivers literally flowed with large gold pieces. But as time went on, it became increasingly difficult to find decent quantities of gold.
As more miners flocked to California, mining became less and less profitable. Within 7 years, a once-booming industry had all but disappeared. In the end, only the largest and most sophisticated mining operations could still make a profit.
In crypto, mining has followed an eerily similar trajectory.
In 2010 bitcoin mining was a revolutionary innovation that enabled individuals to get paid for their contributions in an automated and decentralized way. Block rewards were generous, with 50 bitcoin distributed roughly every 10 minutes, and the computational difficulty of finding a new block was relatively low. But as the price of bitcoin rose, more people began to mine and the difficulty of finding a new block rose exponentially.
To make matters worse, the size of bitcoin’s block reward is getting smaller. In order to maintain a stable rate of inflation, bitcoin was designed so that its block reward halves every 210,000 blocks. We’ve seen this happen already in 2012 and 2016, and the next halving is expected in 2020. From 50 bitcoin to 25 and now to 12.5, the rewards for mining are on the decline.
As a result, only miners with the most sophisticated computers and the lowest cost of electricity can compete in today’s environment. However, as mining becomes less profitable, many miners are switching to a new business: node operations.
Although nodes have been around since the beginning, early projects like Bitcoin do not share their block rewards with node operators. Today, however, many crypto projects include node operators in the block reward in order to incentivize them and make them a more prominent part of their ecosystems.
What is a Node?
A node is a device on the blockchain that helps to validate blocks and transactions. Nodes are responsible for making copies of the blockchain and are at the heart of the entire system of decentralization.
The greater and wider a node network is, the more secure and resilient the blockchain platform will be. Thus, it makes sense for blockchain projects to incentivize node operators to participate.
Dash was the first major cryptocurrency project to incentivize node operators with the creation of Masternodes. Masternode operators are entitled to 45% of Dash’s block reward. However, a Masternode operator must stake 1,000 Dash (over $150,000 at the time of writing) and as a result the returns to Masternode operators are low.
Seeing the benefits of having a robust node network, Horizen (formerly ZenCash) followed Dash’s lead and created Secure and Super Nodes, which receive 20% of Horizen’s block reward. Given the low cost to operate a Secure Node (under $600 at the time of writing) the yields to Secure Node operators can be substantial.
As a result, Horizen has built the largest node network in the industry with over 22,000 nodes, surpassing even Bitcoin and Ethereum. This is particularly impressive given Horizen’s much smaller market cap but clearly demonstrates the power of incentivizing stakeholders in the right way.
How Can I Start Running a Node?
Just like mining, running nodes requires a fair amount of technical knowledge and a decent amount of equipment. Horizen Secure Nodes, for example, require the node operator to have a computer with at least 4GB of RAM, a dedicated internet connection, a static IP Address and a valid TLS certificate. Plus, the node operator must be sophisticated enough to set up the node and make sure it remains up.
Luckily, even if you don’t have the technical know-how to do all of that on your own, there are still ways to get involved. Node service companies provide a hassle-free way to profit from nodes without handling any of the infrastructure requirements yourself or having any technical knowledge.
You simply pay a third-party provider a low monthly fee (between $6 to $10 a node) and you get to keep all of the crypto generated. Employing this strategy can have very impressive annual returns.
What Does This Mean for Crypto Law Insiders?
Insiders need to be aware of trends in our industry.
As mining rewards decrease, mining difficulty increases, and the price of crypto remains flat, small and mid-sized miners are increasingly unable to operate profitably. Only the largest and most sophisticated miners will survive.
Many miners who can no longer mine profitably are looking elsewhere to achieve the hefty returns they’ve grown accustomed to. Node operations appear to be the answer as many operators earn double-digit returns for their computing power.
Given the growing interest in node operations, expect to see many more projects carve out a piece of their block reward for node operators. If you are launching a new project, you should seriously consider accommodating this trend upfront. Not only will you generate interest and enthusiasm for your project from node operators, but you’ll ensure your project develops a robust node network.
However, it’s important to remember history. As more node operators run nodes, the profitability of doing so will also decline. It happened with gold miners. It happened with bitcoin miners. It will happen with node operators too. My advice is to get in now while the market is still new and returns are still generous. But realize that in a few years it’s likely that only the largest and most sophisticated node operators will still be profitable.