merkle-tree

What Is A Merkle Tree And Why It Matters To Understand Blockchain Business Models

A Merkle tree is a data structure encoding blockchain data more efficiently and securely. The Merkle tree is one of the foundational components of a Blockchain protocol.

Understanding Merkle trees

Merkle trees are data structures that enable the secure, efficient, and consistent verification of data in a large content pool. This makes them a core component of a decentralized blockchain network.

Merkle trees were created as early as 1979 by Stanford University computer scientist Ralph Merkle. In a report titled A Certified Digital Signature, Merkle designed a new process for rapidly verifying data. Decades later, his idea has fundamentally changed the world of cryptography and the way in which encrypted computer protocols function.

Before going any further, it is helpful to mention the resource-intensive nature of blockchain. Each transaction on a blockchain has a unique, 64-character code ID that occupies 256 bits of memory. Collectively, blockchains are hundreds of thousands of blocks long, with each block containing several thousand transactions.

Processing this data requires an enormous amount of memory and computing power, leading to inefficiencies. To reduce CPU processing times and use as little data as possible, Merkle trees take each transaction IDs and use mathematics to create a single, 64-character code.

These are known as Merkle roots and will be discussed in more detail in the next section.

Merkle roots

Critical to an understanding Merkle roots is an understanding of hashing functions.

Hashing functions are algorithms that take inputs and generate unique outputs. Every block on a blockchain network uses hashing functions to generate a Merkle root.

By their very nature, Merkle trees group data inputs (transaction IDs) into pairs. In cases where there is an odd number of inputs, the last input is copied and paired with itself.

To explain the whole process better, say for example that a single block contains 844 transactions.

The Merkle tree would begin by creating 422 pairs, with each pair of transaction IDs subject to a hashing function. In other words, a new 64-character code would be created for each of the 422 pairs.

The process is repeated as 422 pairs become 211 pairs, with the latter once again subject to a hashing function. The process continues to run until a single code remains, or the Merkle root.

Benefits of Merkle trees

Primarily, a Merkle tree considerably reduces the amount of data that must be maintained during verification.

A Merkle delivers four key benefits, including:

  1. A reliable way to prove both the validity and integrity of data.
  2. A significantly lower amount of required memory to verify transactions.
  3. A way to obtain required proof and management without sending excessively large amounts of information across the network. This is achieved by providing a means of hashing records on the ledger to separate proof of data from the data itself.
  4. A means of verifying transactions in a block without having to download the entire block. This is referred to as Simplified Payment Verification (SPV) and is commonly used by lightweight Bitcoin clients.

Key takeaways

  • A Merkle tree is a data structure that encodes large amounts of blockchain data in a more efficient, secure, and consistent fashion.
  • Merkle trees group data inputs into pairs and then use mathematical hashing functions to assign each pair group a new code. Groups are progressively whittled down until one piece of code remains, otherwise known as the Merkle root.
  • Merkle trees are crucial to the integrity of blockchain networks because they reduce the amount of data that must be maintained during the verification process.

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Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which reached over a million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy | Visit The FourWeekMBA BizSchool | Or Get The FourWeekMBA Flagship Book "100+ Business Models"