May 31, 2024

Merkle Tree in Blockchain: Understanding Crypto Data Storage

dYdX

Numerous blocks of crypto transfers exist, and they’re piling up as we speak. This means increasing storage demand for maintaining a blockchain's comprehensive history, placing a significant burden on computers (aka nodes). Downloading and preserving a complete transaction history is essential for ensuring network security, transparency, and decentralization, but the process increasingly challenges efficiency as the scale of cryptocurrencies expands.

To make these ever-expanding data requirements manageable for nodes, blockchain developers created systems that summarize transaction data without introducing centralization or sacrificing security. Enter Merkle trees––one of the most widely used cryptographic technologies designed to optimize blockchain data storage for peak efficiency. 

In this guide, we’ll break down Merkle trees, how they power blockchains like Bitcoin and Ethereum (ETH), and how they help Web3 branch out. 

What is a Merkle tree in crypto?

A Merkle tree, also called a hash tree, is a data structure technique used to organize, summarize, and encrypt transaction data on cryptocurrency blockchains. Computer scientist Ralph Merkle introduced and patented the idea in 1979, and it has since become a popular method for processing and arranging information on networks using cryptographic technologies. 

Merkle trees, as the name suggests, have a hierarchical tree-like structure with a foundational Merkle root, which leads to Merkle branches and Merkle leaves. In this model, the leaves contain a unique ID for single transactions, branches contain data of combined leaf transactions, and the root contains a summary of all the transaction information in each block. 

All this data is interrelated, with the Merkle root representing the data in one single space. This allows Merkle trees to reduce the memory storage burden for nodes, as they don't need to record every individual transaction as long as they have the root. The clear organizational structure of Merkle roots also makes it easier for node operators and crypto traders to search through transaction data and pinpoint individual transactions. 

How does a Merkle tree work in blockchain? 

Before diving into how Merkle trees work, let’s review the basics of cryptographic hash functions

A hash function is an irreversible, unique, and fixed alphanumeric string symbolizing an associated piece of digital data (aka an input value). In the case of cryptocurrencies, the inputs are transactions on the blockchain, meaning every time someone sends crypto, it goes through a hashing function and receives a distinct hash value. 

Merkle trees use a cryptographic hash function’s determinacy and reliability to summarize every transaction by constantly combining transfer info and creating new hashes until they reach the Merkle root. In this bottom-up system, blockchains first create hashes for each separate transaction (i.e., Merkle leaves). Then, these trees combine leaf values to create hashes for Merkle branches and continue this Merkle hashing process until they reach one hash value for every transaction in the block (i.e., the Merkle root).

What are the benefits of Merkle trees in blockchain?

Cryptocurrencies majorly use Merkle trees to take advantage of data compression, making transaction verification easier for node operators. But beyond enhancing blockchains’ efficiency, Merkle trees introduce a few security features to decentralized protocols. Here are a few: 

  • Creates compact files for large datasets: Since each Merkle root hash is a complete representation of multiple transactions in a block, storing and sharing up-to-date records on network activity takes considerably less memory space. The lower data burden makes it easier for more blockchain nodes to participate in validation, enhancing a crypto network's decentralization, scalability, and efficiency. 
  • Provides tamper detection: Each hash in a Merkle tree relates to earlier transaction values, so there's no way to change information associated with a leaf, branch, or root without altering the entire network. The complex interrelationship of hash values in Merkle trees makes it simple for nodes to spot signs of data tampering and keep their networks error-free. 
  • Boosts security with collision resistance: Along with tamper protection, cryptographic hash functions in Merkle trees are collision-resistant, meaning it's computationally infeasible for any two input values to produce the same hash. This feature further enhances blockchains’ integrity, ensuring all the data contained in Merkle trees has unique and cryptographically verifiable identifiers.  

What is a Merkle tree proof of reserve?

Merkle trees are commonly associated with processing transactions on blockchains like Bitcoin, but they've also become a popular tool for verifying treasuries on crypto exchanges and decentralized applications (dApps). 

In crypto, proof of reserve (PoR) refers to a transparent report on the assets and liabilities of a cryptocurrency business or a Web3 protocol. Often, exchanges create a Merkle tree using each client's account data as a leaf to build up to a Merkle root for their liabilities. Thanks to the tamper-resistance of hash functions on Merkle trees, it's easy for third-party auditors to prove the legitimacy of PoR claims and verify their reported on-hand assets meet current liabilities. 

This method also provides crypto traders a path to identify their transaction data (or leaves) within the overarching root function. Exchanges also use other techniques to prove PoR (e.g., screenshots at regular intervals), but Merkle trees have become a more standard method due to their transparency and lack of third-party intermediaries. 

Merkle trees vs. Verkle trees: What's the difference?

First introduced by computer scientist John Kuszmaul in 2018, Verkle trees are the latest iteration of Merkle trees, aiming to further increase scalability. To slim the bandwidth used on Merkle trees, developers behind Verkle trees propose using a technology called vector commitments to produce cryptographically secure branches from leaves rather than cryptographic hash functions. The proposed benefit of this model is it requires less data from nodes to prove a transaction’s validity, as they only need to scan a relatively small proof rather than use the associated hash values in the Merkle tree model. 

Verkle trees aim to offer greater scalability for blockchains—and projects like Ethereum are incorporating them into major updates—but they’re one of the more experimental technologies in the cryptocurrency sector. It may take years before developers fully grasp the complexities of Verkle tree deployment and test the pros and cons of this model versus traditional Merkle trees.

Deepen your crypto knowledge on dYdX Academy 

Curious to learn more about the intricate technologies behind blockchain and crypto? Check out dYdX Academy for more informative articles on the latest Web3 innovations like ZK rollups, liquidity pools, and smart contracts. dYdX also offers a decentralized trading platform for eligible traders interested in crypto perpetual swaps. Discover the benefits, features, and news on dYdX's suite of services on our official blog, and eligible traders can start trading on dYdX today.  

Legitimacy and Disclaimer

Crypto-assets can be highly volatile and trading crypto-assets involves risk of loss, particularly when using leverage. Investment into crypto-assets may not be regulated and may not be adequate for retail investors. Do your own research and due diligence before engaging in any activity involving crypto-assets.

dYdX is a decentralised, disintermediated and permissionless protocol, and is not available in the U.S. or to U.S. persons as well as in other restricted jurisdictions. The dYdX Foundation does not operate or participate in the operation of any component of the dYdX Chain’s infrastructure.

The dYdX Foundation’s purpose is to support the current implementation and any future implementations of the dYdX protocol and to foster community-driven growth in the dYdX ecosystem.

The dYdX Chain software is open-source software to be used or implemented by any party in accordance with the applicable license. At no time should the dYdX Chain and/or its software or related components be deemed to be a product or service provided or made available in any way by the dYdX Foundation. Interactions with the dYdX Chain software or any implementation thereof are permissionless and disintermediated, subject to the terms of the applicable licenses and code. Users who interact with the dYdX Chain software (or any implementations thereof) will not be interacting with the dYdX Foundation in any way whatsoever. The dYdX Foundation does not make any representations, warranties or covenants in connection with the dYdX Chain software (or any implementations and/or components thereof), including (without limitation) with regard to their technical properties or performance, as well as their actual or potential usefulness or suitability for any particular purpose, and users agree to rely on the dYdX Chain software (or any implementations and/or components thereof) “AS IS, WHERE IS”.

Nothing in this post should be used or considered as legal, financial, tax, or any other advice, nor as an instruction or invitation to act by anyone.  Users should conduct their own research and due diligence before making any decisions. The dYdX Foundation may alter or update any information in this post in the future at its sole discretion and assumes no obligation to publicly disclose any such change. This post is solely based on the information available to the dYdX Foundation at the time it was published and should only be read and taken into consideration at the time it was published and on the basis of the circumstances that surrounded it. The dYdX Foundation makes no guarantees of future performance and is under no obligation to undertake any of the activities contemplated herein.

dYdX is a decentralised, disintermediated and permissionless protocol, and is not available in the U.S. or to U.S. persons as well as in other restricted jurisdictions. The dYdX Foundation does not operate or participate in the operation of any component of the dYdX Chain's infrastructure.

Nothing in this website should be used or considered as legal, financial, tax, or any other advice, nor as an instruction or invitation to act in any way by anyone. You should perform your own research and due diligence before engaging in any activity involving crypto-assets due to high volatility and risks of loss.

Depositing into the MegaVault carries risks. Do your own research and make sure to understand the risks before depositing funds. MegaVault returns are not guaranteed and may fluctuate over time depending on multiple factors. MegaVault returns may be negative and you may lose your entire investment.

The dYdX Foundation does not operate or has control over the MegaVault and has not been involved in the development, deployment and operation of  any component of the dYdX Unlimited software (including the MegaVault).

Crypto-assets can be highly volatile and trading crypto-assets involves risk of loss, particularly when using leverage. Investment into crypto-assets may not be regulated and may not be adequate for retail investors. Do your own research and due diligence before engaging in any activity involving crypto-assets.

Leaving site