A Masternode is a form of passive investment in the cryptocurrency world.
You basically buy a large number of coins, usually between 1000 and 50,000 depending on the coin. You agree to hold the coins on your desktop computer in a special type of software called a masternode wallet. This software must be in constant communication with the internet to facilitate transactions and perform other specialized computer software for the cryptocurrency coin blockchain. You need a large amount of technical expertise to set-up this computer software and special type internet connection called a VPS server, which can be very difficult. But once it is created it runs by itself with some monitoring by you and generates income daily, weekly or monthly, depending on the coin. You are paid in the same currency in this masternode and you can then exchange it for Bitcoin, then your fiat currency of choice like the U.S. Dollar, Yen or Rupee to pay bills and spend on whatever you wish. This means significant work in the beginning, but after you set it up it works by itself making you money without any further work from you as except monitoring the software periodically and fixing it when it has problems long as the software works properly and the internet connection is maintained.
A more technical overview is provided below:
Masternode is simply a cryptocurrency full node or computer wallet that keeps the full copy of the blockchain in real-time, and is always up & running. Simply put, a masternode is a server on a decentralized network. It is utilized to complete unique functions in ways ordinary nodes can’t. It can be used for features like direct send / instant transactions or private transactions. 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 as a full node does in Bitcoin. Some of the special functions that these nodes perform are: Increasing privacy of transactions, doing instant transactions, Participating in governance and voting, Enable budgeting and treasury system. These masternode are not standalone but they are always communicating with other such nodes to make a decentralized network and are often referred in short form as MN. Mostly the masternodes perform the tasks that I have listed above but it can slightly vary from cryptocurrency to cryptocurrency depending upon how masternodes have been implemented. But more or less they perform these functions in a cryptocurrency.
No masternode is quite alike as each network has its own pros and cons, but with that said, every system approaches payouts in a different way. Some cryptocurrencies pay out rewards to masternode operators multiple times in a day, whereas other projects payout operators once daily. The benefit of this dynamic is that operators can still earn money and provide a service to the network without having to invest in expensive cryptocurrency mining gear.
Just like full nodes in a cryptocurrency, Masternodes can be run by anyone. However, there is an entry barrier in place to ensure that the system doesn’t get malicious. The entry barrier is what one needs to commit or collateralize certain units of that particular cryptocurrency to run a Masternodes. This is done to ensure that a masternode owner doesn’t cheat or corrupt the system and the best of doing so is by putting this entry barrier where the masternode operator has something at stake in the whole game. So naturally, it becomes very less likely that a masternode operator will cheat because he has a stake in running the whole system and even if he chooses to do so he will be punished in the form of devaluation of their own Holding's. Masternode operators typically win anywhere between five percent and 20 percent of a given block reward, depending on which cryptocurrency is being supported. These rewards help offset the costs of running masternodes in the first place, while also inspiring the creation of further masternodes. A masternode is sort of like next-level cryptocurrency holding. You have to hold a large amount, but in doing so according to the specialized process, you’ll earn constant block reward payouts. And these payouts could be a trove in a decade if prices continue trending upward in the long-term.
References
https://coincentral.com/what-are-masternodes-an-introduction-and-guide/
https://coinsutra.com/masternodes/
https://blockonomi.com/masternode-guide/
https://themerkle.com/what-is-a-masternode/
http://jkcrypto.com/masternodes-explained/