Nodes are critical aspects of blockchain security. Broadly speaking, a
cryptocurrency node is a participant in a blockchain network. Without
blockchain nodes, there can be no blockchain.
The key feature that makes blockchain
technology unique, and part of why cryptocurrency has been so
revolutionary, is decentralization. Bitcoin and most other cryptocurrencies
aren’t controlled by a central server or group of servers. Instead, the network
functions in a peer-to-peer (P2P) manner. People interact with each other
directly rather than through a third-party intermediary, thanks to network
nodes.
Related: Pump and dump schemes in crypto: An overview
How Do
Blockchain Nodes Work?
For decentralization to work, there has
to be a way for the network to maintain its integrity. Everyone has to be
assured that all transactions are valid and that no one on the network is
cheating by double spending or
reversing transactions.
The process of everyone on the network
agreeing that transactions are valid in the absence of a central authority is
known as “achieving consensus.” It is the network nodes that achieve this
consensus among users, helping to make the blockchain secure.
Consensus Algorithms
Consensus refers to the rules by which a
blockchain network operates and confirms the validity of information written in
blocks. Confirming this information can be complicated with large networks
involving large numbers of people, hence the need for a consensus algorithm.
The original consensus algorithm is
Bitcoin’s proof-of-work (PoW) algorithm. Proof-of-Stake (PoS) is
another popular consensus algorithm that works somewhat differently but seeks
to achieve the same goal. Many DeFi protocols utilize PoS. Both
algorithms rely on full nodes for the validation of transactions and
enforcement of network rules.
For the sake of simplicity, in this
article we will assume that someone is interested in learning about Bitcoin
nodes that run on PoW.
Anyone can download the entire Bitcoin
blockchain and validate blocks. This increases both the security and the
decentralization of the network, as more copies of the ledger come into
existence and can be referenced by others. Bitcoin nodes can be run by anyone
in the world with the proper hardware and an internet connection.
7 Types of
Blockchain Nodes
To recap: A node is one computer in a
network of many that follows rules and shares information.
The term “node” is sometimes used
interchangeably with the term “full node,” but they are not the same. A “full
node” is a computer in the Bitcoin network that stores and synchronizes a copy
of the Bitcoin network’s entire blockchain history.
Full nodes are important for several
reasons, not the least of which being that they vote on proposed changes to the
network. When more than 51% of full nodes don’t agree on a proposal, it gets
skipped. Sometimes this leads to a hard fork, as was
the case in 2017 with the Bitcoin Cash fork.
While there are several types of full
nodes, there are also lightweight nodes. Below, we’ll highlight both
lightweight and full nodes.
1. Light Nodes
Lightweight nodes or “light nodes” do
not hold full copies of the blockchain. Light nodes only download blockheaders,
saving users significant download time and storage space. Nodes of this nature
depend on full nodes to function and are used for simplified payment
verification (SPV).
2. Archival Full Nodes
Most often, when someone uses the term
“full node,” they are referring to an archival full node. This is the primary
node type that forms the backbone of a blockchain network. Archival full nodes
are servers that host the entire blockchain, with every single transaction
recorded in their databases. The main task of these nodes is to validate blocks
and maintain consensus.
Archival nodes can be broken down
further into two subcategories: nodes that can add blocks to the chain and
those that cannot.
3. Pruned Full Nodes
A pruned full node is one that saves
hard disk space for its users by “pruning” older blocks in the blockchain. This
type of node will first have to download the entire blockchain from the
beginning. After that, it will begin deleting blocks beginning with the oldest
and continue until the node only holds the most recent transactions up to a set
size limit. If a node operator were to set the size limit to 250 MB, then a
pruned full node would hold the most recent 250 MB worth of transactions.
4. Mining Nodes
In crypto mining,
miners are either full or light nodes that try to prove they’ve completed the
work required to create a new block. This is where the term “proof-of-work”
comes from. To accomplish this task, miners have to either be an archival full
node themselves or get data from other nodes to learn the current status of the
blockchain and how to work on finding the next block. (Those who seek to run
mining nodes might want to take into account crypto mining electricity
costs.)
5. Authority Nodes
Authority nodes are used by consensus
algorithms for networks that aren’t fully decentralized, including Delegated
Proof of Stake and Proof of Authority. In these networks, either the
development team will decide how many authority nodes are needed and who will
run them, or the community could vote for the decision. The task of these nodes
is the same as full nodes in other networks.
6. Masternodes
Masternodes cannot add blocks to a
blockchain. They only serve to validate and record transactions. Running a
masternode can earn users a share of the network’s rewards. Doing so requires
first locking away a certain amount of money in the form of the network’s
native token. DASH is an example of a network that uses masternodes.
7. Lightning Nodes
Lightning nodes don’t quite fit the mold
of any of the nodes discussed so far. The main idea of a lightning node is to
establish a connection between users outside of the blockchain, enabling what
are referred to as “off-chain transactions.”
This reduces the load on the network and
allows for much faster and cheaper transactions. Bitcoin lightning transactions
typically cost 10 or 20 satoshis, or the equivalent of a fraction of a penny.
How to Set Up
and Run a Full Node
Running a full blockchain node comes
down to the following:
• Choose a blockchain (Bitcoin, for example)
• Acquire the hardware and/or software needed
• Start running the node
The first thing required for running any
kind of node is the necessary hardware. This often involves a small computer
like a Raspberry Pi. There are three different ways to run a full node. They
include:
• Hosting a node in the cloud via Amazon Web Services or
Google Cloud
• Running a node on your local device (which requires a lot
of hard disk space and RAM)
• Using a “node-in-a-box” solution or building one from
scratch.
After that, it’s just a matter of
maintaining and monitoring the node.
The Takeaway
People might choose to run full nodes
for a variety of reasons, including increased privacy or a desire to support
their network of choice. Lightweight nodes and full nodes alike come with
wallets that can be used for making cryptocurrency transactions. Full nodes
provide greater privacy, as outside observers have a hard time distinguishing
between transactions being processed by the node and transactions sent by the
person running the node.
Learn more:
- Ripple vs Bitcoin: 3 differences between these cryptos
- Crypto technical analysis: What it is & how to do one
This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
SoFi Invest
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA/ SIPC. SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA, the SEC, and the CFPB. PDF File, have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
More from MediaFeed:
Beginner’s guide to crypto trading bots
Crypto trading bots are just what they sound like: programmable, virtual robots that make automatic trades. A human trader can program a trading bot to follow certain rules and execute particular trading strategies. A bot can either send signals to its user or execute trades automatically as market conditions change.
This type of trading is also sometimes referred to as “high-frequency trading” or “algo trading” because it allows for many trades to be placed quickly and relies on computer algorithms to follow pre-set rules.
In the United States, the share of high-frequency trading in equity markets is estimated to be 50%. While similar data hasn’t yet been collected on crypto markets, a significant portion of the trading activity on most cryptocurrency exchanges may also happen at the hands of bots.
Related: Guide to taxes and cryptocurrency
jpgfactory/istockphoto
Trading cryptocurrency, or any asset for that matter, can be a lucrative but difficult task. Investors looking to build a well-balanced crypto portfolio might choose to take every advantage they can.
Timing the market is not an easy thing to do. The vast majority of actively managed investment funds in the world of traditional finance never outperform the major benchmark indexes. It’s not unreasonable to assume that the same might be true for crypto markets when it comes to hedge funds or retail traders.
One of the many reasons individual investors and teams of institutional investors may fail to beat the market in the near term might have something to do with trading bots. Bots can make decisions in milliseconds, making them hard to beat.
Jirapong Manustrong / istockphoto
The crypto bot can accomplish this by either:
- Sending trade signals to the user
- Executing buy or sell orders automatically
In the first instance, users would be notified the moment certain market conditions are met, at which time they could execute a trade manually. This might be a simpler version of a bitcoin trading bot.
What most traders are after is the second option: A crypto trading bot that can do more than send real-time signals to a human trader—one that can track things like price movement, trading volume, demand, buying or selling pressure and other variables.
Bots can execute many trades in a fraction of the time it would take a human to place a single buy or sell order.
Crypto trading bots are designed to be used by traders to act on market changes the moment they happen. Rather than waiting for something to happen before trading, or using a simple stop-loss or stop-limit order, bots can be programmed to wait for certain signals and trade accordingly.
istockphoto
A bitcoin trading bot that executes trades automatically works by interacting directly with a cryptocurrency exchange and placing buy or sell orders when certain predetermined conditions are met.
In terms of the user interface, trading bots work in a variety of ways.
Some come with an internet browser plug-in that allows the trader to interact with the bot. Others have standard operating system clients that come as downloadable apps. And some come in the form of software designed for cryptocurrency exchanges.
ipopba / istockphoto
Trading strategies also involve multiple methods:
- One common method relies primarily on exponential moving averages. A bot might be programmed to place particular trades when this indicator moves beyond a certain point.
- Some bots use variants of the EMA approach, such as double exponential moving average or triple exponential moving average. A moving average is derived from the average of price movements over a set period of time, e.g. a nine-day moving average or 50-day moving average.
A double exponential moving average combines data from two moving averages to make decisions, a triple exponential moving average uses three, and so on.
Other automatic trading indicators sometimes used by crypto trading bots include the relative strength index and certain regression analysis techniques.
Basically, bots use technical indicators (which are based on mathematics relating to price action) to make decisions.
Ivan-balvan / istockphoto
A human trader might use technical indicators when looking at a chart and try to plan trades accordingly. Obviously, doing so takes a long time for even the most experienced person. A bot, on the other hand, can be programmed to look at these things and act almost instantaneously.
Different types of bots also exist. While our discussion so far has focused on bots that work on a single exchange, there are others designed for what’s called inter-exchange arbitrage.
Arbitrage involves taking advantage of the price differences of a single asset across different trading platforms. If bitcoin or another cryptocurrency is trading at $10,000 on one exchange and at $9,950 on another, an arbitrage bot could buy the asset on the exchange where it’s cheaper and sell it on the one where the price is higher.
These methods can sometimes be used in conjunction with one another.
istockphoto
Automated trading is a well-known and legal activity across most financial markets. Half of stock market trades in America are automated, and the process is 100% legal.
Likewise, in most countries and on most cryptocurrency exchanges, there are no laws that prohibit the use of crypto trading bots. That said, it can be helpful for investors to familiarize themselves with cryptocurrency rules and regulations before diving in.
Marc Bruxelle / istockphoto
A crypto trading bot can be profitable when used carefully and under the right circumstances.
When placing large volumes of orders over a short time span, it becomes possible to rack up profits by squeezing out small gains on each trade. Of course, losses could quickly mount as well.
Perhaps one of the biggest benefits of a crypto trading bot is that it takes the emotion out of trading. Greed and fear can harm a portfolio and even the economy.
When things go up, investors tend to get greedy, and this can make them biased to the point that they might miss changing market conditions until it’s too late to take profits.
When things go down, investors tend to get fearful, and they might make bad decisions while in a state of panic, like selling at the bottom of a downtrend.
However, using a crypto trading bot doesn’t work in “set it and forget it” fashion. To begin, a trading bot strategy will be needed. On top of that, it could be wise to consider the fact that markets don’t always trade on technical analysis alone.
Bots aren’t capable of recognizing fundamental market forces like big news headlines or rumors (as when PayPal announced it would allow users to buy and sell crypto on its platform).
RobertAx / istockphoto
When choosing a crypto trading bot, there are some considerations an investor will want to pay attention to:
- How complex is the bot? Beginners might prefer to use bots that employ existing strategies.
- Fees should be clearly outlined up front, with no hidden costs.
- What’s the credibility of the team that created the bot? Do they display their contact information, offer a support team, and offer a public profile?
- Word of mouth counts—what do others have to say about the platform? (This info can be gained from other crypto investors as well as online research.)
- What strategies does the bot use? For investors with a preference—such as arbitrage, for example—this matters.
Velishchuk / istockphoto
Trading bots are a potential way to begin investing in cryptocurrency. A bot can send signals to its user or execute trades automatically and lightning fast. And a crypto trading bot can take the emotion out of trading in cryptocurrency, which has a higher degree of risk than traditional investments.
Learn more:
This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
SoFi Invest
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
Andre Francois on Unsplash
Featured Image Credit: peshkov / iStock.
