There is no denying that the cryptocurrency space is full of technical jargon. It can be overwhelming, believe me I know. But it’s worth understanding so that you can navigate the space with ease.
In this article, I will be covering one important term known as crypto nodes. It is an essential concept to understand as it forms the basis of blockchain technology. So without further ado, let’s jump right in.
Crypto nodes refer to individual computers in a decentralized network. These computers validate transactions which help secure the network.
What are crypto nodes?
To understand crypto nodes, we first need to define what blockchain technology is. Essentially, it is a distributed ledger that details each transaction. This ledger is a database that is completely open, transparent, and immutable.
Crypto nodes are computers that secure this technology by keeping a copy of all transactions and verifying them. By distributing copies of the blockchain across nodes, the network becomes more resistant to manipulation and cyber attacks.
They work in unison to check every transaction. The greater the number of nodes the more secure the network.
Moreover, crypto nodes are managed by validators who check each transaction to make sure they are correct. In most blockchain networks these validators operating the nodes receive rewards in return. This is usually in the native currency.
For instance, validators who operate nodes on the Ethereum network receive Ethereum as compensation. Not only that, but they can also participate in governance proposals and ultimately shape the development of the project.
Types of crypto nodes
Mining nodes – this is the node type that Bitcoin has. Essentially, it utilizes a proof of work mechanism to solve complex puzzles in a process known as mining. Miners compete to verify transactions. This process requires powerful computers to solve these complex puzzles. As a result, this process is extremely energy intensive.
Staking nodes – this method utilizes the proof of stake mechanism. Simply put, validators stake a certain amount of coins to operate a node. This number varies between cryptos but for Ethereum, it is 32. Once staked the cryptocurrency is locked. This is to incentive honest behavior, if bad actors validate illegitimate transactions their stake is taken in a process known as slashing. The main benefit of proof of stake is that it is less energy-intensive than mining.
Top 3 crypto nodes
Ethereum – this is the second most popular cryptocurrency and rightfully so. The benefit of staking with Ethereum is that it’s arguably the most reputable crypto in this industry. To operate a node users are required to stake 32 Eth. As compensation, you are rewarded an estimated 5% APR.
Solana – this novel blockchain is efficient, fast, and has huge institutional backing from the likes of FTX. When it comes to staking the rewards are a generous 6% APR. Additionally, the lockup period to operate a node is only a few days. That being said, the nodes require powerful hardware which increases the barrier to entry considerably.
Cardano – this is another great pick that is commonly compared to Ethereum. Released in 2017 it also uses the proof of stake mechanism. When compared to Solana the hardware requirements to set up a node are low with just 16Gb of ram and a 1.6GHz or more CPU. Moreover, unlike the first two nodes mentioned, users can unstake their Cardano at any time. At the moment staking rewards are between 5% and 10%.
To learn more about staking, click here.
Risks of setting up a node
The first risk of setting up a crypto node is slashing. If a validator does not perform the required tasks then a percentage of their staked funds are seized. In turn, this can also affect users who delegated to them.
The second risk is liquidity risk. As your coins are locked up they are extremely illiquid. This can prove problematic due to the volatility of the market. Users cannot quickly respond to the change in price.
The last risk is nothing new, hacks. If you interact with a fake website or shady smart contracts your wallet may get compromised. Research is key. Find reputable projects and don’t fall for the common scams.
The best way to protect yourself from hacks is using a hardware wallet. The one that I recommend is the Ledger Nano X. Click here to check out my review.
Overall, nodes are an integral part of securing blockchain networks. They check the honesty of participants and the validity of the transactions. Not only that, but they provide an excellent passive income source. If you pick a reputable network then it’s an excellent way to diversify your income streams, but be careful of smart contracts bugs, slashing, and hacks. I hope you found this article useful and thanks for reading.
Want to learn about crypto doxing? Click here to read my previous article.