Beginner’s Guide to Merkel Trees in Blockchain

Merkle trees improve data integrity, efficiency, Scalability Within blockchain networks, it has become an important part of this rapidly growing technology.

A staple of the computer science ecosystem, Merkle trees are also used in the cryptocurrency space. Recently, interest in them has increased within the crypto sector as a result of the FTX debacle.

This article thoroughly explores Merkle trees in blockchain, explaining what they are, how they work, and their applications in the industry.

What is a Merkle tree?

Merkle trees (also known as hash trees or binary hash trees) are a data format with applications in computer science and cryptography.

At its core is a hierarchical layout of data blocks defined by cryptographic hashes. This hierarchical arrangement of data blocks gives it a tree-like appearance.

The Merkle tree concept was the brainchild of Ralph Merkle, who patented it in 1979, which is where it gets its name. These are critical in protecting data purity and security in areas that deal with large datasets like blockchain.

Merkle tree structure in blockchain

To better understand the structure of a blockchain Merkle tree, imagine an upward-sloping tree with three main levels. There is a merkle root at the top, non-leaf nodes occupy the middle part, and leaf nodes are at the bottom.

Leaf nodes are the building blocks of Merkle trees. These are hashes of all transactions that occur within a particular block. These may be better known as transaction IDs (TXIDs), which can be viewed in block explorers.

The non-leaf nodes that form the second level of a Merkle tree are bundles of paired leaf node hashes. Their name comes from the fact that they do not contain a TXID. Instead, only the transaction hashes of the two leaf nodes that create them are stored.

Finally, the top non-leaf node of the tree has a Merkle root. A single hash representing all blocks. transaction hash. The Merkle root is the exclusive identifier of a block and is very important in validating the authenticity of the block.

How does a blockchain Merkle tree work?

Here’s how a blockchain Merkle tree works.

Step 1: Hashing the transaction

A cryptographic hash function (such as SHA-256) hashes all transactions within a block. This process generates a unique ID (hash) for each and makes that data irreversible.

Step 2: Pairing the hashes

The same function pairs and hashes two transaction hashes to create a new transaction hash. This pairing and hashing is repeated at each level, with each child node forming a new parent node.

Step 3: Formation of Merkle root

The last two parent (non-leaf) nodes are paired to form a single hash, Merkle root. This is the cryptographic fingerprint of the entire block and serves as its heading.

Step 4: Verify block integrity

To verify the integrity of a particular transaction, retrieve the corresponding hash from the Merkle root. You can start from there and follow the parent nodes to recreate the Merkle root. If the two match, the transactions in the block are genuine.

Consider a simple example where four transactions A, B, C, and D occur within a particular block.

1. Transaction hashing: Each transaction is hashed.

• Hash A = Hash(A)
• Hash B = Hash(B)
• Hash C = Hash(C)
• Hash D = Hash(D)

1. Pairing and hashing: Hashes are hashed in pairs.

• Hash AB = Hash(Hash A + Hash B)
• Hash CD = Hash(Hash C + Hash D)

1. Creating a merkle route: The resulting hashes are hashed together to create a Merkle root.

• MerkleRoot = Hash(Hash AB + Hash CD)

Merkle Tree as Proof of Reserve

Proof-of-Reserve (PoR) is a bookkeeping practice centralized exchange (CEX) and other cryptocurrency custodians to prove their financial health. This is a public report on the company’s cryptocurrency holdings. With the rise in cryptocurrency-related fraud cases, calls for PoR audits are increasing.

Given that CEX holds large amounts of crypto assets, the Merkle Tree is a convenient way to prove its reserves. Here’s how they’re helping you achieve that.

• Collecting user balances: CEX or the administrator creates a list of all users and their balances.
• User balance hash: It then uses cryptographic functions to hash each user’s holdings.
• Building a Merkle tree: CEX arranges hashed user balances into a hierarchical structure. These are then hashed in pairs to form the Merkle root.
• Publish a Merkle route. The next step is to share the Merkle root publicly. This activity allows users to check their balances without exposing their entire list of credits.
• verification: Users can check their balance by obtaining the Merkle proof, which is the path from the balance hash to the Merkle root.

Why is Merkle Tree important for blockchain?

Merkle trees improve data integrity, efficiency, Scalability within the blockchain network. It creates a tamper-proof identifier for each block by hashing the individual transactions and joining them to the Merkle root. Therefore, modifying a transaction changes the Merkle root and alerts the network to possible tampering.

Additionally, it helps streamline verification. Users can quickly check the probability of a transaction by comparing the transaction’s hash with the hash in Merkle’s tree. Additionally, there is no need to download and compare entire blocks.

It also contributes to blockchain scalability by reducing data transmission and verification requirements. In this way, it helps improve network performance. Additionally, we minimize storage needs by only storing Merkle roots and associated transaction hashes. Therefore, it is beneficial for nodes with limited storage capacity.