The Evolution of a Masternode Project: What to look for when deciding to invest in a masternode project.
Realizing in early 2018 that it was going to be a long and tough road for crypto this year, I sought other areas to invest. I came across masternodes, and their promise to pay “rewards” or dividends based on holding a certain number of coins, and becoming a node on their network by hosting a server on my computer for the overall system. At first it seemed overly complicated, but if you have above average tech skills, some patience and time, you can have a masternode up and running in a few hours and start earning “rewards”.
My first masternode investment was in a very small project. I wanted to make sure I could actually set one of these nodes up before investing in a larger project. After getting the first up, my confidence rose and I made some significant investments in some larger projects. Over the past six months I have invested in a nice collection of masternodes, numbering almost 30, and have become actively involved in a number of the communities. At one point in March-April all of my Masternodes were earning a couple of thousands dollars per month. As of today, they are down significantly to several hundred dollars per month, but despite this, I continue to invest in select projects that I believe have what it take to become successful.
Here is what I have learned.
Masternode projects go through a general cycle that I have witnessed a number of times now. And while I do not like to generalize, I have found a particular pattern that if you watch carefully, will allow you to separate the good from the bad projects, and will also give you early warning signs to get out of a project.
PHASE 1: The Vision or The Excitement
The Devs (the project creators are affectionately known as the Devs, short for developers) decide to make a new project, a new coin. The Devs will undoubtedly have a vision for their new coin. Whether it be just another cryptocurrency, or a cryptocurrency with a particular use, the vision will be big - if you are going to dream, dream big as they say.
The Devs enlist the help of marketing types who go out and pump the coin on social media as the new next big thing. Now it is very important to remember that if you invest enough you will have the right to have a masternode on their network. And this masternode will receive “rewards” in the form of the projects coins at set intervals. From a marketing perspective this is amazing, the message,.”invest x in this project and earn dividends y that you can sell back into the market!”
Also remember that the project just creates the coins to pay these masternode holders, so the value of the coins received is only what the market is willing to buy them for. This results in a constant supply of new coins being brought to the market as masternode holders sell the “rewards” they receive. So long as there are more people interested in investing in the project, there will be buyers of the rewards. During Phase 1 there are plenty of investors willing to buy the coins being sold because more people are learning about the project - also known in the community as FOMO, or Fear of Missing Out.
As the marketers begin to promote the project, the Devs go to work “forking” another project. The word “fork” is a fancy way of saying, they download another projects code, make some simple changes, and then call it their own. In many regards it is as simple as searching and pasting code changes and creating new graphics. And since it is so easy to do, we see a lot of masternode coins popping up all over.
The Devs also go to an exchange to list their project so people can buy and sell the project’s currency. While it is difficult and very costly to get on large exchanges, it is quite easy and very inexpensive to get on smaller exchanges, some charging as little as .2 BTC or less.
During this time, there is a lot of excitement and enthusiasm. The project embraces the vision. The promise of a new investment that earns rewards almost perpetually brings a lot of people to the table.
PHASE 2: Launch Day
With great anticipation the launch of the new (copied) coin comes. The new “wallet” is released to great fanfare. The coin opens for trading on the exchange. Those who were not able to buy the coin during the pre-launch phase start buying up coins on the exchange to create their own masternodes to collect “rewards”. (The rewards are greatest at the beginning of a new coin to encourage early investment and then gradually reduce over time but never to zero.)
Launch is great success, and the price inevitably (except for poorly pumped projects) “moons” or goes up dramatically. Masternode holders begin receiving rewards, some hold the rewards, other sell the rewards on the exchange. Discord, the community social chat channel for the project, lights up with congratulatory discussion and emojis of rockets. The Dev team pulled it off - the new network is up and running. The Dev team sits back to admire their work. Investors talk about how their dev team is different, involved, with a purpose.
Phase 3: Delivering on the Vision
The first crop of Masternode coins, think DASH, promised faster payments, more anonymity, and cheaper transaction fees than Bitcoin. There are very few projects like DASH and maybe SmartCash that can claim actual adoption and use of their coin as real currency. However, the vast majority of projects that simply offer a new cryptocurrency are failing or have failed.
The new crop of Masternode coins must have a purpose in order to succeed. Whether it be creating a video game sales site, promoting the environment, a new decentralized database, a security portal, a trading application, etc., every new project has a purpose and utility. And every Dev team promises that after launch, they will begin to deliver on this promise.
Delivering the product or purpose of the coin has become problematic for the devs. Why? Remember this project was built on copied code from another project. Even the wallet that everyone is so excited about is the same wallet Bitcoin uses just rebranded. Are you starting to see the problem?
The Devs are normally excellent at downloading someone else’s work and hacking the code together to make it look like it is indeed their project. To the unassuming eye, the creation of the masternode network and the wallet all look like legitimate and difficult endeavors. It takes someone with extremely good basic coding skills to pull this off. You need to know your command-line commands, you need to know your compilers, you need to understand networking, and you need to be patient and work through the errors - knowing a good graphic designer is also very helpful. However, to create a masternode network, you do not need to know how to write code.
This is one of the very first warning signs I look for in a coin. It is relatively easy for the devs to deliver on the network and wallet, and all the marketing collateral to promote the coin. Now is the time to build something the masses will use. And for this, you need a lot more coding skills than what is needed to build the network and wallet. Start to watch carefully how things progress from here.
Keep asking, do the Devs really have what it takes to build the widget they promised? If you get the sense they do not, get out - very few projects can afford to retain talented programmers to deliver on their vision. Worst yet, many of these Devs do not know what it will take (programmers, technology, marketing) to deliver on the promises they made.
On the other hand, if you see product development begin and continue as evidenced by Dev updates, screenshots, partnerships, demo sites, etc., you may be part of a great project.
Phase 4: What is the coin used for?
This is the question that I have stumped most Devs with. What is your coin actually used for? What does it represent? The answers to this question has led me to sell a number of masternode investments immediately because I realized the Devs had no idea how the coin related to their product.
Again, you need to remember the Devs in the vast majority of cases have no ability to modify the code of the coin. The vast majority of these coins are simply copies of Bitcoin or DASH or PIVX - they are cryptocurrencies that can be used for payments, etc. Aside from being used as a currency, they have no other purpose.
If you are going to say your project is going to build a portal to buy and sell used widgets, you eventually have to ask, what are you going to sell them for? Unless it is DASH or SmartCash or another big player, if the devs answer, we are going to buy and sell using our projects currency you have a major problem. Potential customers of the portal do not have the projects currency. So the devs are basically proposing, a potential customer needs to acquire the projects currency before they can use the project’s widget portal. So, potential customers have to convert Bitcoin or another crypto into the projects crypto before they can use the project’s site. You had better be selling some unique widget if you really believe a potential customer who knows nothing about your project is going to go through this conversion before using the project’s site. There are competitors, who just accept credit cards.
I have argued with a number of devs who really believe that a potential customer will convert their Bitcoin to their project’s native currency in order to access their portal. They do not see the problems fraught with this including the volatility of their currency price. No one in their right mind will convert their Bitcoin into an even more volatile currency. I had some Devs tell me that eventually their coin price will stop being so volatile - some day when? Bitcoin is still incapable of being used as a store of value.
If the devs do not have a clear use for their coin that is directly tied to potential customers using the coin in a meaningful manner, get out. It is very hard to backwards engineer use into the project. I am working with three projects assisting them define and link their coin to their project. It is no easy feat.
Phase 5: Price Drops to the Floor
Once all the excitement falls, and the difficult questions begin to be asked, the price inevitably plummets. The masternode “rewards” are worth less and less, which causes many to begin to sell. The Devs begin to make promises, new marketing is rolled out, maybe a new white paper or roadmap to keep the price afloat.
Whether the team has the capability or not to deliver on their promises there will be a long period where the Dev team actually has to go to work and create the product. This will take much longer than any investor is willing to wait. As patience with the Dev team erodes, the community begins to become louder with their demand for information.
In response to the demands and to stem the price fall, the Devs will often begin to give more information to the community, hold chats to answer questions, etc. This keeps the investors at bay for a short while, but more and more coins are coming on to the exchange daily from the “rewards” being given to the masternode holders.
Another area that has caused alarm is the basic lack of economic understanding many of these devs have for currency. You would think they would read a book or two about managing a currency before starting this endeavour, but they do not. Concepts of supply and demand, inflation, reinvestment, capital outlay, marketing expenses are at extremely basic sub-high school levels in most cases. It is very hard to manage a currency if you do not understand basic money concepts.
As the price continues to fall, demands become even louder. The Devs start showing up less and less. News becomes more infrequent. The excitement is replaced by excuses. Many of the devs do not get paid or take a salary so they complain about having to work a real job and work the project. They complain about the overall market performance driving their price down. They begin to complain that they haven’t had enough time to build anything. When you see the enthusiasm being replaced by excuses, get out.
And eventually when the complaining becomes too loud, the Devs stop coming altogether. And that’s the funny thing. Unlike most projects when the Devs leave, the project dies. But because of the decentralized nature of the technology, these networks live on, investors continue to receive “rewards” from their masternodes, exchanges continue to earn fees as the dead coins are bought and sold, and the investors are held holding largely worthless coin from a project without leadership.
Phase 6: Legit project or die.
If you find a project that offers:
a unique vision and a unique product;
a Dev team with the capability to develop their own code;
a project that applies its cryptocurrency to the product in a sensible marketable manner; and
a Dev team with the leadership capability and integrity to carry the vision forward for the time it takes to realize success,
you may have a project worth investing.
Please contact me about new projects and projects that you believe meet my basic criteria.
In the coming days I will be releasing another article for Masternode Devs on how to build and maintain a successful project. Please like and follow!
Onwards and Upwards,
Jack Fleek
Follow me on Twitter: https://twitter.com/fleekico