The cryptocurrency market is often associated with rapid price swings and changing market conditions. One minute, we are all excited about new all-time highs, and the next, critics are calling the industry a bubble waiting to pop.
The laws of demand and supply are constantly at play and effective crypto solutions must account for this flux. Surprisingly, many masternode and staking projects do not factor in these dynamic market conditions in their designs, creating a risk-reward imbalance for investors. This is where DECENOMY’s upcoming “Dynamic Collateral” feature comes in, promising to revolutionise masternoding as we know it.
Join us as we delve into Dynamic Collateral; what it is, how it works, and everything in between.
The Flaw of Fixed Collateral
To operate a masternode, participants must have a minimum amount of cryptocurrency known as collateral. This fixed collateral varies from blockchain to blockchain; ranging from a few hundreds to thousands of dollars.
Although masternoding is one of the ways to earn passively from cryptocurrencies, it carries some risks. Masternodes typically require a significant upfront investment in cryptocurrency to be used as collateral. This can be a deterrent for new participants and exposes their investment to potential losses if the coin’s price drops.
Secondly, selling large quantities of the coin to exit a masternode position could be difficult. The market might not readily absorb a big sale, potentially impacting the coin’s price and making it harder to recoup your investment. This is particularly true for lower-capped digital assets.
A fixed collateral structure, which is the model currently being used by many masternode blockchains, is not designed to adapt to changing market conditions. As a result, fluctuations in price and user interest can significantly impact the supply and demand of both coins and masternodes. Furthermore, it offers little flexibility to masternode operators since they cannot fine-tune the collateral amount to optimise their risk-reward ratio.
DECENOMY’s Dynamic Collateral adjusts collateral values based on “real-time metrics, market demand, and network requirements.”
DECENOMY’s Upcoming Dynamic Collateral
In practice, the feature will adjust the collateral value at every 100,000 blocks, based on three key parameters – the coin’s current supply, a predefined target percentage of the supply locked in masternodes, and the desired number of masternodes in the network. This approach balances supply and demand, decentralisation, and network security.
Dynamic Collateral addresses some of the bottlenecks associated with the fixed collateral model by balancing the number of nodes within a network.
Dynamic Collateral allows for more flexibility and adaptability of the network to changing market conditions and user preferences. It incentivizes participation and investment in masternodes by setting the collateral amount at a level that balances risk and reward. By creating opportunities for price fluctuations and arbitrage, it gives masternode operators more ways to profit.
In the future, the system will use real-world data to fine-tune the algorithm’s parameters, allowing DECENOMY coins to better adapt to current market conditions.
