The biggest obstacle in the way of mass adoption of cryptocurrency and DeFi services is the fact that blockchain is an advanced technology. Entering the market, amateur users embark on a long and steep learning curve that requires them to tackle many technical concepts. However, investors who at least understand the basics are better able to navigate the crypto space and are less likely to fall for malicious projects and high-risk strategies.
An important concept to consider at the beginning of your learning process is the Merkle tree. It is a method of organizing data in a network that ensures its efficiency and reliability. The algorithm is fundamental to the operations of many cryptocurrencies like Bitcoin and Ethereum.
What is a Merkle Tree?
In basic English, a Merkle tree is a way to compress large input data into a single string of characters. The output data is fixed in length and is also called a Merkle root.
To understand how a Merkle root is formed, first, you need to learn about the hash function. On-chain, every transaction is run through a mathematical function to generate a unique encrypted output that looks like a string of numbers and letters - hash value. It serves two purposes. Firstly, it compresses data of any size so that it becomes more manageable, which in turn saves on storage and improves the efficiency of the blockchain. Secondly, the hash function serves a security purpose. The input data is encrypted and the same length of the hash value makes it impossible to guess the weight of the input information.
Building Blocks of the Merkle Tree Concept
A Merkle tree is formed by repetitively hashing pairs of nodes until only one hash is left for the entire block. Thus, the tree has ‘leaves’ or initial transactions; ‘branches’ that are also called parent nodes and represent the intermediate hashes; and a ‘root’, which is the final hash.
A simplified version of a Merkle tree looks like this:
Users make 4 different transactions that are paired and hashed to form leaf nodes. Then the leaves are hashed together to form 2 parent nodes. By hashing the branches, we get a root hash or a Merkle hash that is stored in a block header.
In reality, a single tree includes many more leaves and much more data than illustrated above and is also much wider. Also, Merkle trees always group all transactions into pairs. If the number of inputs is uneven, the last input is copied and paired with itself. Where are Merkle Trees Used and What are the Benefits? Merkle trees are widely used in the blockchain industry and the concept is incorporated into the operations of top cryptocurrencies like Bitcoin and Ethereum.
The first use case is the simplified verification of transactions with a mechanism known as Merkle proofs. A Merkle proof consists of a leaf hash value (the root hash of the tree) and a combination of all of the hashes in the path between the initial transaction to the root. A user can request a Merkle proof to verify that the transaction was added to the blockchain and that it is in a particular block.
The mechanics of a Merkle tree also serves to simplify block mining. A miner pairs the transactions they want to include and constructs a Merkle tree. The Merkle root is then placed in the blockhead and hashed. Thus, the miner saves on resources, negating the need to hash the whole block.
The Merkle tree concept makes a big difference in the way blockchains operate, store and manage data:
It allows one to verify a transaction without keeping a copy of every single transaction that has ever occurred on the blockchain. It simplifies the process and ensures the efficiency and scalability of the network. Merkle proofs minimize the amount of information transmitted across networks.
Closing Thoughts This is just an introduction to the Merkle tree concept, covering its uses and benefits. In reality, Merkle proofs in Ethereum and Bitcoin have several differences and nuances but this overview is sufficient to give a general idea of how the data is stored on-chain.