How do you verify a valid transaction on a blockchain if it processes a million transactions every second? Can a business only view transactions relevant to its operations and ignore all other transactions? The answer is yes. You can use overlays and services to identify transaction outputs by type. Read on to learn more about what an overlay network is and how it works.
The advent of Teranode and its large-scale data processing capabilities mean that the current methods used to identify and isolate relevant transactions from a set of all transactions must change. “Global listening” involves taking the stream of deals being announced and using filters to identify which of them are relevant to a particular business or project. Examples of this method include GorillaPool’s JungleBus and Planaria’s older BitBus.
This method is suitable if you already have to process all transactions, i.e. if you are a miner like GorillaPool. What if you are a service business and not a miner?
The weakness of global listening in this case is that as the network expands (as the total volume of transactions and blockchain data increases), more bandwidth is used and wasted. Filtering methods also need to be expanded. Teranode will expand the BSV network exponentially, and listeners around the world will be unable to keep up. For every project, it becomes financially impossible to collect every transaction processed by the network without corresponding fees.
Therefore, the main purpose of the overlay is to allow enterprises to maintain their own set of unused transaction outputs (UTXOs), i.e. their own set relevant to their operations. Many projects are already trying to do this in some form, using technologies they have developed in-house for their own purposes, and now, in retrospect, these systems are commonly referred to as overlays.
Mining nodes must maintain a full set of UTXOs to be able to verify all transactions. An overlay only needs to maintain its own subset.
This is where overlays come into play.
Instead, the overlay uses Simple Payment Verification (SPV) and Merkle paths instead of full block data. To give you an idea of how this scales more efficiently, imagine a business that processes one transaction every 10 minutes (573 bytes). Observing and filtering the entire transaction data requires 340,000,000,000 bytes of information. With SPV, that reduces to 1,537 bytes, making SPV 221 million times more efficient at Teranode scale.
SPVs are not a new concept. In fact, the original Bitcoin whitepaper from 2008 detailed the only way a blockchain like this could operate at scale. SPV uses Merkle proofs to verify whether a transaction is included in a block, using only data in the block header.
An overlay is a way to create a shared context by maintaining a subset of transactions and allowing users to read data from the chain using SPVs. It also provides a framework for monetizing distributed systems that opens new economic opportunities for service providers. For example, a service may track UTXOs associated with a token or a specific type of token (loyalty points, event tickets, or CBDC). Wallets like HandCash or RockWallet can use overlays to track only UTXOs associated with their services. These professional services ideally combine a set of UTXOs with a search function, charging a small payment for each service they perform for their clients. Projects built on the BSV blockchain can leverage and leverage these services without having to develop and maintain their own overlay.
How to identify your transaction type
How do you classify UTXOs? There are several ways to identify a specific UTXO type based on its structure. This can be data contained in a simple OP_RETURN, or simply data via metadata tags.
ProjectBabbage’s Confederacy Lookup Services is an example of how an overlay works. Categorize UTXOs into “topics” and feed them to a custom data store. It can also distribute read load across multiple hosts for the same topic, solving the problem of open protocol service discovery across P2P overlay networks.
Jake Jones, Head of Network Infrastructure at the BSV Association, spoke about Teranode and the need for an overlay network at a recent sCrypt Hackathon event. His full presentation on this topic is in the following video:
Overlay is another example of how the BSV protocol rules allow for greater specialization within the blockchain industry. Miners/nodes process all transactions to keep the network secure. The overlay provides a service layer that allows applications to share context and retrieve relevant subsets of the UTXO set. This specialization is necessary to maintain a functioning blockchain/Web3-based digital economy as blockchain scales to meet the world’s data needs.
View: Teranode is the future of the BSV Network
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