As more and more Masternode coins are coming out every day you might be interested in one or the other project. Good. Masternodes are a means in which one can earn a passive income. It helps you to make some extra gains when the market is dull and in addition to that it gradually helps build your cryptocurrency portfolio. This quick guide is not about why masternodes or what masternode is; as you know its benefits and already chosen a coin with good ROI. Here this post is to clear some of the security concerns which most beginners have before setting up their first Masternode.
So you have your collateral amount ready to setup your node. Now after seeking help from developers and community you are advised to purchase a VPS from Vultr or Digital Ocean. They are cheaper and the most reliable service providers recommended by the Masternode community. As you now have your server ready you are asked to download the wallet, create new address and send the collateral amount. Wait! should I send my coins to the wallet on the VPS server? How could one trust these third party services especially when it comes to large amounts of money? No, that’s why masternodes are designed to work in a hot / cold setup. What is hot / cold masternodes and how it works?
Hot Node vs Cold Masternodes
First of all lets clear out what is a hot and cold wallet in cryptosphere. Any cryptocurrency wallet that is connected to the Internet are called hot wallets and the one that is not connected to the Internet are cold wallets. There are different types of hot and cold wallets and they both have their advantages. However when it comes to security cold wallets are highly preferred. Since this type of wallets are not connected online hackers cannot access and steal the coins. Great! But how does this concept of cold wallet work with masternodes as they needed to be connected online 24 / 7 to relay transactions and enable special functions on the blockchain. Okay, lets first understand what hot wallet masternodes are and why they are unsafe. Next we’ll cover about cold masternodes, how it works and its advantages.
Hot Nodes – Hot Masternode setup
Hot node, Hot Masternode or Hot wallet masternode are all the same. The process in setting up hot masternodes is very simple. You download the wallet to your remote Windows or Linux server. Then launch the wallet and wait for it to completely synchronize. Once done create a new address and send the collateral amount to your VPS wallet address. Once that is done configure the wallet file accordingly and enable the masternode.
The problem with this kind of setup is that your collateral coins are held in wallet on the VPS server. Let’s say your VPS wallet is encrypted with strong passphrase and additionally you also have a backup of this wallet. Now what are the risks of getting hacked and losing funds? In addition to securing your wallet there are so many measures you can consider to protect your VPS server. But with all those measures it is uncertain that your VPS or wallet will be 100% safe and secure. Even the VPS server providers could access the file system, log keystrokes and can do any harm. This is why everyone recommends to not keep your coins on masternode server. Instead they suggest to run cold nodes. What are cold masternodes and how do they work?
Cold Nodes or Hot / Cold Masternode setup
Cold nodes or cold masternode setup are also sometimes called as hot / cold Masternodes. The reason is this kind of setup involves 2 wallets. One wallet will be installed remotely on your VPS server. It is called masternode wallet and they don’t hold any of your coins, that’s why it’s considered cold. The second wallet will be installed on your local personal computer. They hold all your coins and it is considered as hot wallet as they are connected to the Internet. So how do they work?
Both the wallets that is your remote VPS wallet and your local PC wallet will have a full copy of the blockchain. However your local wallet is the one that is safely holding the collateral amount and so you have full control of your private keys. Now using local controller wallet you’ll create a secondary private key which is also called as masternode private key. This masternode private key doesn’t give access to your coins but instead it acts as a communication. This key is the proof that you own the funds and it tells the cold online wallet to act on behalf of the hot wallet. Now using local controller wallet you initiate communication and once the masternode is enabled you can safely close your local QT wallet and take it offline. Only your VPS wallet that has no coins will stay online 24 x 7.
Hope it helps you to understand what hot masternode and cold masternode is. Now only thing you need to remember is to never ever run a so called hot nodes or hot masternodes which are highly unsafe.