Demystifying Blockchain: The Building Blocks
When Bitcoin was launched in 2009, it initially drew the attention of libertarians, curious technologists, and anarchists alike. The digital currency brought about a peer-to-peer electronic cash system, where individuals could send money without a bank or third party acting as an intermediary. Through that brought about a fundamental shift in how we thought about data exchange. The technology that enabled this new digital currency, blockchain, allowed for transaction exchanges to occur in a trustless environment, where transactions were recorded on a public ledger which was secure, traceable, transparent and immutable.
Fast forward to today where information is key, Blockchain seems to be the ideal technology for completely transparent information stored on an immutable ledger that can only be accessed by network participants. Imagine a world where every payment, process, or contract would have a digital ID that could be validated, stored, and shared. Industries across Healthcare, Government, Financial services, and many more stand to benefit from the removed friction and improved trust. It’s easy to see the tremendous upside that Blockchain has.
Those exposed to this emerging technology have heard about the potential for blockchain to revolutionize industries and the way we interact with information as we know it. We too at Boldstart are excited about the potential of this emerging technology, but we emphasize a cautious optimism given the hype associated with Web 3.0 today. Security today stands to be improved upon, given recent breaches such as the Ronin validator security breach, where ~$600 million in funds were stolen through hacked private keys. We believe much more innovation is needed around the infrastructure, if blockchain is to fully realize it’s massive potential. While the impact of blockchain may be huge across industries, we believe institutional adoption will be gradual rather than immediate. In this three-part series we’ll explore the core components of this technology including Blockchain Nodes, the role of Oracles, and the importance of Web 3.0 security at the core of this technology. Let’s dive in…
Blockchain Nodes
As more investors and institutions increase interest in blockchains such as Ethereum and others, there is a greater need to understand how these systems work.
Traditionally, a node has been described simply as connection point on a large network, devices such as a PC have the capability to recognize, process, or forward transmissions to other nodes.
As it relates to blockchain, a node is a computer that is linked to an underlying cryptocurrency network and may perform certain tasks such as producing, receiving, and moving data. Blockchain nodes help to maintain the network; they are devices that keep track of a distributed ledger and serve as the communication pipeline for various tasks.
The primary function of a blockchain node is to maintain the consensus between other nodes and verification of transactions. Each node also holds a copy of the blockchain, thus being more secure through the sheer number of nodes in a given blockchain that participates in the validation of blocks (blocks being the basic containers of information in a blockchain).
Functions of a node
Blockchain nodes are essential to maintaining data integrity — each node in the system must know each stated traction is valid without interference from any potential bad actors. Because on a given network there is no central authority to manage it, achieving consensus is how transactions are deemed valid or not. Proof of Work (PoW) and Proof of Stake (PoS) are popular consensus algorithms relying on nodes, in particular full nodes, to enforce network rules and validate transactions. When consensus is reached by the majority of network validators, it saves and stores a new block onto the chain and syncs the data, maintaining a copy of the ledger throughout. Becoming a network validator often requires extensive hardware and software capabilities; we explore the Ethereum node requirements in the sections to follow.
In summary, nodes are responsible for the following:
· Nodes allow for seamless recall of transaction data, allowing users to verify records
· Nodes allow for the preservation of blockchain data, through managing a copy of the distributed ledger
· Based on the type of node, some nodes patriciate in the consensus algorithm of the network to validate transactions, while others simply keep record
Blockchain Nodes by the numbers
Using the Ethereum network as an example, we can see that the demand for becoming an Ethereum validator node has increased exponentially. There were 405,385 validators in Q2 2022, compared to 338,078 validators in Q1 2022. This represents nearly a 20% increase in the total number of Ethereum Beacon Chain validators. With the Ethereum Proof of Stake merge approaching later this year, we can expect the demand for becoming a validator on PoS based blockchains to continue to increase.
Running a Node
Standing up an independent node could prove to be a lucrative endeavor in many cases, the type of node is often dependent of the requirements of a given blockchain. The two prominent types of nodes are Full Nodes and Lightweight Nodes.
Full Nodes: Full Nodes act as servers to a blockchain, similar to how online search results are pulled from local servers that maintain that information. Similarly, full nodes store a copy of the blockchain transaction data to help maintain the decentralized nature of the network. In addition to this, they also participate in governance; they hold the responsibility of deciding on network proposals including any upgrades or improvements, deciding on a majority basis.
Lightweight Nodes: Similar to how local servers do not store all information, but rather store information based on recent activity for faster data pulls, lightweight nodes act in a comparable manner. Their function is just to keep the relevant data to facilitate daily tasks — they don’t participate in network validation.
In theory, a single full node could operate a blockchain but would be vulnerable to system downtime and attacks. The more nodes a blockchain has, the more durable the blockchain is. If a large number of nodes suddenly go offline, it only takes one node with the whole blockchain history to back up and restore access to all the data.
Deploying a blockchain node may very well prove to be lucrative as retail and institutions continue along the adoption curve. Deploying a node is no easy task requiring system administration skills and intensive hardware / software requirements which differ across blockchains. For example, the Ethereum minimum node deployment requires:
· 32 ETH balance to activate an individual validator
· A fast CPU with 4+ cores
· 16 GB+ of RAM
· A fast SSD drive with at least 500GB+ of space
· 25 MBit/s+ bandwidth
Along with these requirements come possible hurdles around bandwidth limitations, regulatory issues, anti-virus limitations, and third-party attacks. Launching a node requires high costs for purchasing hardware that complies with network requirements, continuous uptime of internet usage, and constant monitoring. Alongside these requirements come potential risks associated with staking Ethereum, namely “slashing” penalties, which take place when a validator shows harmful behavior, a percentage of their bonded/staked tokens will get reduced as a penalty. The second risk associated with staking Ethereum is the potential for node offline penalties; if and when a validator goes offline, that validator will lose the amount of Ethereum roughly equivalent to what they would have gained if they had remained online.
Nodes as a service
As the number of blockchain nodes increase over time, so do the costs and complexities in managing all the necessary tasks to keep the blockchain infrastructure up and running.
Solutions such as Quicknode, Alchemy, Infura, and Blockdaemon alleviate some of the pain associated with running an individual node by providing the core infrastructure to set up and maintain the nodes connected to a given blockchain.
The people and expertise needed to build, run, and scale nodes are not a core proficiency of many companies. For an institutional client, these solutions mean having direct access to major blockchains like Bitcoin, Ethereum, and Solana all without dealing with on-prem or cloud resource constraints. Institutions can now focus on their core businesses while knowing their blockchain infrastructure needs are taken care of on the back end. This is the promise of these Infrastructure solutions.
Blockdaemon is a leader in the space, providing businesses the tools for blockchain projects across their life-cycle: testing in early-stage developments; staking/reporting; clusters for exchanges/custodians; and APIs for developers. Blockdaemon’s platform helps scale blockchain networks securely with enhanced monitoring, back-up systems, HA clusters, and APIs and cloud-managed node monitoring of on-premises solutions. Through Blaockdaemons’ 24/7 monitoring, they ensure 99.99% uptime and, in the case of rare slashing events, they provide a 100% insurance guarantee to compensate for any slashing penalties incurred.
Closing Remarks
The role of a blockchain node is extremely important, and can best be compared to the role of a server as it relates to the internet. Traditionally, computer networking has always relied on a client-server model. This is an architecture whereby a client or an individual node operator would connect to a server to send a request to gain access to a shared service. In this layout, synchronization of data is made easy given the server acts as the single source of communication. As one could imagine, this model lacks robustness, if the server undergoes failure or Denial of Service (DoS) attacks, then the entire network is now disrupted.
Blockchain is designed to eliminate the centralized eliminate by operating in a Peer-to-peer (P2P) communication architecture. In this layout, all nodes have the ability to function as both a requesting client and server through keeping a copy of the distributed ledger, whereby this ledger is shared and agreed upon through network consensus mechanisms.
This shift in architecture could translate to huge value unlock for institutions as any institution that rely on a secure connection between endpoints, offices, data centers, and more could leverage blockchain solutions to strengthen their risk management profile through improved regulatory controls, and improved operational efficiencies through the elimination unnecessary intermediaries.
Having a firm understanding of blockchain nodes is vital to understanding how the overall technology works today and where the technology is heading tomorrow. In this piece we’ve uncovered a blockchain node’s function and importance, as well as the process of running an independent node.
Though we remain bullish on the space, if blockchain is to achieve mass adoption, a greater understanding of the components that make up a blockchain will be crucial for investors and founders looking to enter the space.
In the next piece, we dive further into understanding how oracles help maintain the integrity of a given blockchain.
If you’re an investor or builder in the space and would like to connect, feel free to reach out to me at Ernest@Boldstart.vc or on twitter @ErnestAddison21
