A Merkle tree is a way of organizing and structuring large amounts of data to make it more straightforward to process. In the case of cryptocurrency and blockchain, the Merkle tree is used to structure transaction data in a way that is less demanding on resources.

Merkle trees are often used with peer-to-peer (P2P) networks because of the need to have information shared and independently validated. Let’s understand more about Merkle trees and how they work.

Merkle tree structure

The Merkle tree, also known as a hash tree, has a binary tree structure, with the hashes of the transactional data on the bottom row being referred to as “Lead Nodes,” the intermediate hashes being referred to as “Non-Leaf Nodes,” and the hash at the top being referred to as the “Root.” Even though the majority of hash tree implementations are binary (each node has two child nodes), they can also have a lot more child nodes.

When looking at the structure of a Merkle tree, all transactions are grouped in pairs. Each pair has a computed hash that’s stored directly in the parent node. These nodes are also grouped into pairs, after which their hash is stored on the next level up. This process continues until reaching the root of the Merkle tree.

Let’s take a look at each of the nodes:

Leaf Nodes

These are the hashes of each cryptocurrency transaction in a block, also referred to as transaction IDs (TXIDs). You view the transaction hash when you search for a transaction on a block explorer.

Non-Leaf Nodes

Then, to create a layer of non-leaf nodes above the leaf nodes, these leaf nodes are hashed together in pairs. They are known as non-leaf nodes because, in contrast to leaf nodes, they merely store the hash of the two leaf nodes that it represents and don’t contain transaction IDs (or hashes). As a result, there will be half as many hashes (or nodes) in the non-leaf node layer above the leaf nodes as there are in the leaf node layer. As the tree narrows as it ascends, these non-leaf node layers continue to be hashed together in pairs, resulting in half as many nodes per layer. Two nodes will be present in the final non-leaf node layer. This creates the Merkle root and is the location of the last hashing in a Merkle tree.

Merkle Root

With Bitcoin, the hashes of all transactions are combined into a single hash and stored in the block header. The Merkle root, also known as the root hash, is this particular hash. The leaf nodes (transaction IDs/hashes) at the base of the Merkle tree can be verified using this Merkle root. When used for cryptocurrency, the Merkle root makes sure that data blocks are unaltered, undamaged and whole.

A Merkle tree is binary, which means that the total number of different leaf nodes must be even for the tree to be properly constructed. When an odd number of leaf nodes exists, the previous hash will be duplicated to provide an even number of nodes.

What are the benefits of using the merkle tree?

Efficient data verification process

It’s easy for transaction integrity to be verified in practically no time at all. Because of how the data is structured, very little memory needs to be used during the verification process and the computing power required is significantly reduced.

Because blockchains typically consist of hundreds of thousands of blocks, each of which can contain up to several thousand transactions, validating the data poses two major challenges: memory space and computing power. Every node on the network would have been required to maintain a complete copy of every transaction that has ever taken place on the blockchain if Merkle trees were not a concept in the blockchain. A node would have had to compare each entry line by line when verifying a transaction to ensure that its records exactly match the network records. The network’s security could be jeopardized if there was any discrepancy between the records. As a result, to compare the records to make sure there had been no changes, the computer used to validate the data would have needed much more processing power.

Merkle trees, on the other hand, offer a solution to this issue by drastically reducing the amount of data that must be kept on hand for verification needs. They hash every entry in the ledger, effectively separating the data itself from the evidence supporting it. Without knowing every single TXID in a block, you can check a TXID using the Merkle root with a Merkle tree. A Merkle tree is essentially a great way to demonstrate that something is present in a dataset without having to download the entire set. Consequently, less computing power is needed to validate the transactions.

Faster processing speed

As a result of the distribution of the transactions on the block among the validators, each validator is working on a different transaction at the same time. Compared to a method where each transaction is sequentially validated after another, this is much more effective.

Usage of crypto wallet

Simple Payment Verification (SPV), which enables you to confirm a transaction without downloading an entire block or blockchain, is made possible by the Merkle tree. This enables the use of a light-client node, more formally known as a crypto wallet, to send and receive transactions.

Detection of any tampering

The hash structure makes it easy for miners to identify if tampering has occurred with transactions.

A distinct hash value is generated for each block using the Merkle root. The block links one block to another in the blockchain by including the hash of the preceding block. The hash of any transaction changes whenever that transaction is modified. The block becomes invalid as a result of this change because it cascades up to the Merkle Root and alters its value. This then causes a change in the hash of the following block, rendering the remainder of the Blockchain invalid. As a result, the Merkle tree creates an immutable record of the block’s transactions.

Double spending can also be prevented as a result. If an individual tries to double-spend his digital currency, a hash will be generated for that transaction. If that hash matches the existing records present on the Blockchain, that transaction is rejected.

What is the popular Merkle Tree Proof-of-Reserves (PoR) recently?

Currently, multiple CEXs have come forth to develop a Merkle Tree Proof-of-Reserve mechanism. In this section, we will be looking into Merkle proofs and how our users can validate their funds.

Merkle Proofs

A Merkle tree proof is a cut from a Merkle tree, not the actual tree. And be represented as an array or sequence (shown by the yellow portion in the diagram below).

All of the leaf nodes and the balance information for a particular single user of our company are represented by the figure’s last level nodes. Assuming that the pink people in the figure represent the intended recipients of the proofs, we extract the orange portions of the figure level by level and present the proof documents to the users in order of height. It’s significant to remember that the Merkle proof has two main components

The direct parent nodes (i.e., B and D) of this user are not extracted.
Provide the root node, i.e. Merkle root.

Taking the volume of 10 million users as an example, the height of the tree can be calculated as Log2(10,000,000) = 23.2534966642 based on the mathematical formula, which gives the height of the tree as 24 levels. Therefore, the nodes in the graph that are intentionally not provided to users will be 24 – 2 = 22.

Merkle tree is a complete binary tree, which allows us to calculate all of the information about its parent node by simply knowing the left and right nodes. Two parts make up this complete information: the balance data and the hash data.

Balance Data: The parent node data can and can only be split to its lower left and right nodes.
Hash Data: Only balance data, tree hierarchy data, and child node hash data will be present for each node (each node keeps summary data of the left and right nodes below it).

The validation of the Merkle tree is computed by deriving the B and D and verifying that

the balance is in accordance with the splitting principle; and
the hash is legal.

By utilizing a hash summary function, the Merkle tree enables users to determine whether they are a part of the entire tree without having to be aware of every purple node in the graph. The Merkle proof is exclusive to that user. For instance, a 24-level Merkle tree requires an array of 23 elements to verify the user’s balance information, and this array can only confirm that the user’s balance proof is accurate.

The user cannot reconstruct the entire tree based on his or her fragmented information as long as they do not obtain more than half of the total number of users. As a result, the Merkle tree protects both user privacy and the company’s ability to prevent the leak of information about the company’s overall assets.

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