As peer-to-peer networks, blockchains are maintained by nodes located all over the world to ensure that there is a single source of truth and to prevent anyone from breaking the rules of the protocol. To achieve this, nodes host and synchronise complete copies of the blockchain, preventing any double spending of coins.
There are distinctions between different types of nodes for different crypto-assets. For instance, in Bitcoin full nodes fully validate transactions and blocks. They support the network by accepting transactions and blocks from other full nodes, validating them and relaying them to other full nodes too.
On the other hand, lightweight nodes depend on full nodes since they do not store the entire blockchain, and instead download only the block headers. The task of a lightweight node is to verify transactions on the blockchain using Simple Payment Verification (SPV).
Full nodes are a requirement for mining cryptocurrency but there are many reasons why cryptocurrency traders may also want to run a full node. Below we highlight four reasons why traders should run a Bitcoin node (or nodes for the cryptocurrencies that they actively trade).
If you’re running a lightweight client, you have to rely on someone else’s full node to broadcast your transactions to the network. As a result, an adversary could potentially prevent your outgoing transactions from being broadcast via denial of service as well as preventing any incoming transactions from being seen.
To get around these problems, you can run your own full node so that you are not required to trust anyone and. When you run a full node, you maintain a copy of the ledger that you’ve validated yourself and there’s no trust involved when it comes to the state of the ledger, past transactions, and so on.
Also, by running a full node, you are enforcing the consensus rules of the protocol and will reject any transactions that break these rules. Even if everyone else accepts the transaction, your full node will reject it and it will not be broadcast. Having your own node also means you can be sure your transactions will be broadcast to the network.
While nodes broadcast valid transactions, only miners can confirm these transactions by including them in a block. To confirm a transaction is valid, the Bitcoin network will ask the full nodes to confirm if the sender has enough coins and how much the recipient will have after the transaction. Once determined to be valid, the transaction will be snapped up by miners to add to a block (and verified through Proof of Work in Bitcoin’s case).
The more independent nodes that are operating, the more copies there are of the blockchain and the more resilient the network is. A greater number of nodes also reduces the latency in sharing blocks. Therefore, running a node doesn’t just benefit the security of your bitcoin payments/holdings, but also improves the overall robustness of the network.
Spot Large Transfers by Whales and Long-term Holders
The underlying transparency of the Bitcoin network offers the possibility to track any transfers on the public blockchain infrastructure virtually in real-time. As a result, when network participants move large values of BTC, the market recognises this. In fact, Whale Alert and similar Twitter accounts make this easy for traders by tweeting any large movement of BTC (or other major cryptocurrencies).
However, different market participants become aware of a large transaction at different times. For example, the person who initiated the transaction has private information in advance. Once they send the transaction, it is sent to a node in the Bitcoin network. The node checks the transfer (so someone else learns about it), and then forwards it to at least eight other nodes.
Once these nodes check the transaction is valid, the transaction is placed in the mempool, where miners can pick up pending transactions to include in their candidate blocks. Once the transaction is successfully mined, it is recorded in the blockchain forever. As a result, nodes in the network learn private information about an upcoming transfer earlier than non-node market participants.
Lennart Ante, an academic from the Blockchain Research Lab at the University of Hamburg, published a research paper examining blockchain transaction activity and the impact on cryptocurrency markets. The study looks at the data associated with 2,132 large transactions on the Bitcoin blockchain between September 2018 and November 2019, where 500 or more BTC were transferred.
The market gauges the level of information asymmetry tied to the transfers and reacts accordingly. For movements of BTC between exchange cold wallets, the motive is clear, while movements of BTC between unknown wallets carries more uncertainty and is likely to have a greater impact on the market.
As anyone can deploy a node in the Bitcoin network, the research paper recommends that traders should operate nodes themselves to close the information gap and to assess the probability of trading with informed counter-parties. You can also gather statistics on other aspects of the blockchain - importantly, without having to trust third-party data providers.
You can also use a full node to identify transactions from early bitcoin miners (or addresses that have held BTC for a long period of time). For example, a movement of 50 BTC from an address that was dormant since 2009 provoked a large reaction in BTC-USD. Anyone running a full node would have been able to identify the transaction and its significance before they heard about it from the news after the transfer took place.
To take full advantage of Bitcoin’s peer-to-peer system, you have to run your own full node. Otherwise, your transactions are always processed through a third party, i.e., another node that broadcasts transactions from your wallet to the network.
Traders should use full nodes to store their coins and transact to achieve the strongest privacy available. Unlike centralised and SPV wallets, full nodes don’t query third parties. Most lightweight clients use SPV. Instead of downloading the entire blockchains, these wallets use all block headers and the transaction count to determine if a transaction was already included in the blockchain, and Bloom filters to request and match its own transactions.
When using a third-party node, it will query all addresses in your wallet to show your correct balance. An attacker might be able to associate user IP addresses, the submitted Bloom filters and downloaded transactions to know all addresses of a given user. For some users, SPV wallets may be satisfactory. But for a bitcoin user to be truly pseudonymous, however, they have to connect to the Bitcoin network directly with a full node.
In the event of a hard fork, lightweight nodes will automatically follow the chain with the largest accumulated difficulty. While some clients let users choose which chain they want to be on, others do not give their users that choice.
Full nodes always have autonomy of choice: they can choose which side of the fork they want to operate on. Therefore, if you want to be involved in the governance of a protocol, running a full node lets you cast your vote on which fork to follow.
How to Set Up a Full Node?
There are some costs involved with setting up a full node, in terms of disk space, time required to launch a node and bandwidth requirements.
Traders have several options when opting to run a full node:
- Run a node in the cloud using AWS or Google cloud: Create a Virtual Machine (VM) instance to speed up connection and syncing to the cloud from your machine. Make sure that you configure firewall rules to ensure that your instance is not easily breached. Finally, you will need to download Bitcoin Core, the software required to run bitcoin and configure the appropriate port settings on your computer to the cloud.
Run Bitcoin Core on your local machine: Initial block download may take several days. The size of the Bitcoin blockchain is over 300GB, so you’ll need more space than this to run a node on your local machine. Other requirements can be found here.
- Run a node out of the box: Several companies sell Bitcoin nodes with the blockchain already downloaded. These products are the best option for the least technically minded. Users can plug and play and can manage the device through the interface. These mobile devices allow you to avoid most of the work involved in setting up a node.
The main benefits of running a Bitcoin node include: greater privacy, more autonomy, strengthening the network and access to statistics about the blockchain without the need to trust a third party.
For traders, the main benefit is being able to see large transactions (or transactions from dormant addresses/old wallets) that may impact the markets before other nodes.
Also, for cryptocurrencies other than bitcoin, there are sometimes monetary incentives for running a node where a user can earn the native cryptocurrency for keeping their node online (known as masternodes).