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What are nodes in crypto and why are they crucial

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Cryptocurrencies are a decentralised system, independent from traditional banking and governmental controls. One of the main “cogs” in their system are nodes, without which the entire crypto industry would cease to function! The pioneer cryptocurrency, Bitcoin, now has 16 thousand nodes; the second-largest coin, Ethereum, has 7 thousand.

Learn more about nodes, how they work, and why the digital asset market cannot exist without them.

What are nodes

Cryptocurrency is often compared to traditional banking systems, and this comparison also extends to nodes.

For everything to work smoothly, banks constantly verify data about users, accounts, and transactions. The system contacts the information to find out whether you have $300 in your account to pay for groceries and whether your credit history allows you to get an instalment plan. This data may be displayed on the computers of hundreds of bank employees, but it is stored on one or more servers of one facility, the bank, so it is centralised.

Cryptosystems store information as well, but they do it in a decentralised manner with the help of thousands of servers from different users around the world. Each of them can confirm, add, and delete data. Such servers are called data-network nodes or just nodes (from the Latin word “nodus”).

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The data that nodes store is called a "blockchain," which is a transparent ledger that reflects all transactions. We explained the mechanics of it in our article “What are blockchain and consensus.”

Why are nodes needed

All nodes remain interconnected within the cryptocurrency network. They constantly monitor changes in the blockchain, add new records, or confirm the accuracy of those already added, checking data using each other's copies of the ledger. This is how they ensure security, checking whether anyone is trying to carry out an operation that is contrary to the rules of the system.

Imagine that transactions in the blockchain are parcels, and nodes are reception points that check them. The entire system of any cryptocurrency relies on them.

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Nodes have five main functions:

✔️ maintain network stability;

✔️ provide safety;

✔️ maintain transaction records;

✔️ confirm transactions that comply with network rules;

✔️ broadcast reliable information about operations.

Nodes and centralised systems: differences

We have already said that banks, unlike cryptocurrencies, are centralised. Any bank stores data on a server that the facility controls by itself. 

There are three problems with centralised systems:

🙅 Bank clients cannot verify the accuracy of the information themselves. They simply do not have access to the server, so they rely on the honesty of the commercial bank employees and its auditors.

🚧 Just one server failure can stop the entire company's workflow. Clients will not be able to transfer and withdraw money, and employees will not be able to issue instalment plans and loans in branches.

😏 Hackers can steal or replace information on a bank's server. Banking systems are closed, so clients cannot protect their data on their own or at least check its safety.

It turns out that centralised servers are very vulnerable. But without them, banks will not be able to work, store information, and conduct transactions. In cryptosystems, everything relies on decentralised server nodes. 

Nodes solve traditional banking system problems:

👀 Information about transactions on the cryptocurrency network is always transparent and accessible. The blockchain that nodes store is an open ledger of anonymised data. The user can track the path of any transaction using the open ledger.

💪 The cryptocurrency network cannot be shut down. Nodes are settled all over the world. In order to disable the network, you will need to find and turn off each one of them. This is impossible as there could be tens of thousands of them. The more nodes, the safer the system.

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Here is a map of Bitcoin network nodes. It contains only 36% of all nodes; the location of the remaining 64% is unknown. The largest number of identified nodes are located in the USA (9%), Germany (7%), and France (2%).

😎 It is impossible to hack all nodes. Fraudsters simply do not have enough resources; if they replace records in 1-2 nodes, the system will immediately compare data from other nodes and recover if needed. There is also no point in stealing node data; it is just information about transactions that is already available on the opened ledger. The hacks you can hear about in the news happen at other levels of the system, such as crypto wallets, decentralised protocols, and exchanges.

Full and light nodes

Nodes differ depending on their tasks; they can either store information about all transactions or add blocks to the blockchain. We can sever them into two large groups: full and light nodes.

1. The entire blockchain has been downloaded to the full node. It constantly monitors updates and adds new entries. Full nodes supply explorers with data. Explorers are online platforms that show information about transactions on the blockchain. Full nodes also share copies of blockchains with those who want to launch their own node.

2. A light node contains only a part of the blockchain. It is needed to confirm transactions. Each light node is connected to a full one as it contacts it in any controversial situations.

Node types 

You can launch a node to support a crypto project, or you can start it to make money. 

For example, you can support Bitcoin using a stripped-down node. It downloads only the part of the blockchain it has enough memory for. As blocks are added, the node replaces old records with new ones. 

You can make money on four types of nodes: 

1️⃣ Mining nodes are suitable for the Proof-of-Work algorithm. For example, Bitcoin and Dogecoin run on it. 

2️⃣ Validator nodes or staking nodes are needed for Proof-of-Stake coins such as Ethereum and Solana.  

3️⃣ Lightning nodes are responsible for verifying operations in the second-layer add-on over the Bitcoin network, Lightning. They are faster than regular nodes because they only validate Lightning transactions. 

4️⃣ A masternode is a full node that takes part of the profits of the mining nodes. These are used in the Dash crypto project. In some projects, such as NEM, masternodes are called supernodes

Income depends on the type of node, the cost of electricity, and equipment performance. For example, people earn a couple of tens of dollars a month on lightning nodes and up to several hundred on masternodes. 

How to start a node 

There are companies aiming to help users to run their own node, e.g., SenseiNode and Nethermind. If you want to run a node by your own without any side help, here is a brief instruction:

Step 1. Study the node-running instructions provided by the project you want to support. If you violate the rules, you may face a fine. 

Launching a staking node on the Ethereum network requires a stake of 32 ETH (about $64K) and being constantly online. Each month offline will cost 1.4% of the blocked sum. 

Step 2. Select equipment to run the node. Required characteristics are usually mentioned on project websites. 

To run a full node on the Bitcoin network, you need a computer operating on Windows, Mac OS X, or Linux, with 7 gigabytes of free disk space and 2 gigabytes of RAM. 

Step 3. Download the software to run the node and follow the instructions. Here, for example, are step-by-step instructions for launching an Ethereum node. 

Is it a good idea to download the software and launch the node?

By running a node, you can contribute to the security of your favourite cryptocurrency. If you just want to support the project, then go ahead. You only need a computer, free disk space, and a little time. If you want to run a node because of money, be prepared to stake a large amount of funds and face other technical difficulties. Beginners should be prepared for the challenges associated with establishing and maintaining a network node.

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Here are three other cool articles:

What is a spot bitcoin ETF, and why does everyone talk about it

What’s wrong with Binance Web3 Wallet

BitVM to make bitcoin smarter than altcoins

This article is not an investment recommendation. The financial transactions mentioned in the article are not a guide to action. Itez is not responsible for possible risks. The user should independently conduct an analysis on the basis of which it will be possible to draw conclusions and make decisions about making any operations with cryptocurrency.

Maria Kachura
Maria Kachura

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