What is Merkle Tree

A Merkle Tree is a binary tree data structure where every leaf node contains the hash of a data element, and every non-leaf node contains the hash of its two child nodes creating a hierarchical structure that allows efficient and secure verification of large datasets. Merkle Trees are fundamental to blockchain design, enabling Bitcoin and Ethereum to organise block transactions in a way that allows efficient verification without downloading entire blocks.

BUILDING A MERKLE TREE STEP BY STEP

Imagine a block with four transactions: TX1, TX2, TX3, TX4.

Step 1 — Hash the leaves: H1 = hash(TX1), H2 = hash(TX2), H3 = hash(TX3), H4 = hash(TX4).
Step 2 — Hash the pairs: H12 = hash(H1 + H2), H34 = hash(H3 + H4).
Step 3 — Hash to root: Merkle Root = hash(H12 + H34).

Each layer halves the number of nodes. For a block with 2,048 transactions, the tree has 11 levels (log₂ 2048). The Merkle Root at the top summarises all 2,048 transactions in a single 32-byte hash stored in the block header.

ODD NUMBER OF TRANSACTIONS

If a block has an odd number of transactions at any level, the last hash is duplicated to create a pair ensuring every level has an even number of nodes to pair up.

MERKLE PROOFS: THE KEY APPLICATION

A Merkle Proof allows anyone to verify that a specific transaction is included in a block using only O(log n) hashes a logarithmic fraction of all transaction data. To prove TX1 is in the block: provide H2 (TX1's sibling), H34 (the other branch), verify that hash(hash(TX1) + H2) combined with H34 produces the known Merkle Root. This tiny proof just two hashes in our example is as cryptographically trustworthy as downloading the entire block.

MERKLE TREES BEYOND BLOCKCHAIN

Merkle Trees are used throughout computer science: Git version control uses Merkle Trees to track code changes. Certificate Transparency logs use Merkle Trees to verify SSL certificate issuance. ZK-SNARK proofs use Merkle Trees for efficient state membership proofs. IPFS uses content-addressed Merkle DAGs for distributed file storage.

Terms in addition to the Merkle Tree

Blockchain

A blockchain is a subset of a distributed database. The Bitcoin inventors originally prototyped the system in 2008. This modern database is made up of separate blocks that are connected together in a chronological chain. Blockchains may be used to store a wide range of data types. It has mostly been utilized as a public ledger for bitcoin transactions to date. A peer-to-peer network comprised of independent nodes uses a consensus process to ensure the blockchain's security and legitimacy. Each node in the network keeps a public and immutable copy of the data.

2 Factor Authentication (2FA)

2 Factor Authentication is a security measure with two layers. It is used by the majority of cryptocurrency exchanges. To log in, you must provide not only a password, but also a code obtained, for example, from the Google authenticator.

Airdrop

An airdrop is a method of distributing coins. End users can typically obtain coins for free or in exchange for doing a small task, such as subscribing to a newsletter, sending a tweet, or inviting others via a personal affiliate link. Cryptocurrency airdrops — the act of depositing cryptocurrency into public crypto wallets — are utilized as a marketing, liquidity creation, and network bootstrapping technique for many different types of blockchain initiatives.

Altcoin

Altcoin - "alternative coin" - is any kind of digital currency other than Bitcoin. Since the launch of Bitcoin, the world's first digital currency, many altcoins (as well as supporting blockchains) have been created. Altcoin digital currencies share many similarities to Bitcoin, but consistently and have significant differences. There are about 20,000 altcoins, and this number is expected to grow significantly in the coming years. Altcoins often develop Bitcoin features. Ethereum, currently the most widely used blockchain, supports digital contracts and separate applications where Bitcoin does not. Altcoins are also often created to cater to the needs of different users. The Litecoin blockchain, for example, can process payments quarterly for the duration of Bitcoin.

Cold Storage

Cold storage is the way to store cryptocurrency offline. The word refers to the use of offline wallets that are not connected to the internet. Cold storage is the most secure way to keep cryptocurrencies since an offline currency becomes less likely to be hacked and stolen. Paper wallets, printed renditions of private keys, and offline hardware and software wallets are all examples of cold storage.