What Are Cryptocurrency Algorithms?
Newcomers to the cryptocurrency space are bombarded with new concepts and ideas. There’s always a story hot off the presses or a new altcoin to get hyped about. It never ends, and that’s what we love about it.
But instead of looking for the next best thing in crypto, we’re diving deep into a foundational concept in today’s article: mining algorithms.
This is the nitty-gritty technical side of crypto and blockchain technology. We’re spelling everything out in simple terms so that you can follow along and absorb the most essential information.
With an understanding of mining algorithms, you’ll be ahead of the curve in your crypto education, which is always a good thing! Let’s get into it.
Cryptocurrency Algorithms Basics
Before we connect the dots from blockchain to Bitcoin and the process of mining, we need to get a grasp of how cryptocurrency algorithms work and what they are. Here are the basics.
Definition
A cryptocurrency algorithm is simply a version of a hashing algorithm, a mathematical function that transforms information into a complex but highly secure form of output data.
These outputs are known as cryptographic hashes, which can be understood at the signature of a data set or the fingerprints of the data.
Mathematicians and analysts agree that the best way to compare two data sets is to run them through the same algorithm and “hash it” to see how these fingerprints match up.
A fundamental way to understand this is an analogy of a coat check at a venue:
- You give your coat to the person working behind the counter.
- You receive a ticket with a number in exchange.
- Only you and the employee know what coat corresponds to the number on your ticket.
If every coat in the closet looks similar and you don’t want to ruffle through the pockets one by one, that ticket is going to come in handy when it comes time to retrieve your coat!
This is as simple as it gets, but you can expand this concept into the broader fields of math and cryptography to see where it takes us.
A key concept is that hash function algorithms are a one-way street and extremely difficult (not impossible) to invert.
Picture this: We have original input data and want to enter it into the algorithm. Let’s say it’s the words “CARROT CAKE.” Simple enough, right?
But after the name of our tasty dessert passes through the algorithm, it is transformed into a set of numbers and letters of a fixed length.
The output data can be three characters, 10 characters, 64 characters – so many types of algorithms exist with different parameters.
When we put “CARROT CAKE” into the SHA-256 algorithm (the one used in the Bitcoin blockchain) we get the following output:
89d6a27124291a0b1aa3160d561a28e13c502c5f9c02d59c79aca7a09ea80ec8
Yes, that’s a 256-bit (32-byte) hash value that clocks in at 64 characters long.
You don’t need to know exactly how these algorithms process information, but getting the basic concepts down will help you piece together the puzzle of blockchain, crypto mining, and many other principles in IT.
In summary, hashing algorithms take data of any size and any kind and map them to a fixed value hash not to be reversed - just like we saw in our example.
Properties
We jumped ahead to one of the most powerful and secure algorithms in our CARROT CAKE test run above, but bear in mind that not all algorithms are created equal.
Many older algorithms have been hacked or deemed broken at this point, which, as you may imagine, is a big deal! This means that the quest for newer, more robust algorithms is never-ending, with so much on the line -- and as computing power becomes more widely accessible.
Knowing this, what are the properties we’d want to see from a hashing algorithm for something that we want to keep safe and secure. Something like a cryptocurrency, for instance?
Here are a few features that make a hash function algorithm especially useful and secure:
- Lightning-fast speed to prevent mirror-imaging attacks that commonly break algorithms
- Long and complex outputs to prevent the likelihood of system-breaking “collisions” in which two data sets end up with the same hash
- A data set should not be obtainable from its hash (the one-way street is sound)
- Even the smallest changes to the data set will result in a dramatically different hash.
- Multiple use cases like digital signatures, authentication, blockchain, and more
These ideas might seem complex to anyone new to computer science and IT.
But recognizing the pros and cons of certain algorithms takes us one step closer to understanding the complete picture of blockchain and our favorite cryptocurrencies.
Why Algorithms Matter for Crypto Mining
You can now see why hash algorithms are such an important development in the digital world and how we can confidently rely on security measures online and beyond.
But how do hash algorithms fit into blockchain technology and mining cryptocurrency? Let’s connect these dots right now.
Proof of Work
Using SHA-256 as our example algorithm, we can see how hashing forms the foundation of a technology like Bitcoin.
The “blocks” that make up the Bitcoin blockchain contain transaction data and links to past blocks in the form of previous hashes.
Additionally, blocks include a random value known as a nonce (a number only used once) and other bits of information that inform the next block in the sequence.
The goal of the crypto miner is to use high-powered computers to discover the value of the nonce, thereby figuring out the correct hash and solving the cryptographic equation.
The successful completion of this process is known as proof-of-work, and the reward for accomplishing this difficult feat is, of course, freshly minted crypto coins.
The challenge of mining Bitcoin and other cryptocurrencies these days is the increased difficulty of solving each equation, as hash functions become more complex with each block created.
Other Types of Algorithms
We’ve focused on SHA-256 in today’s article to keep things consistent, but there are thousands of other cryptographic algorithms in the world, with new ones emerging all the time.
On the blockchain and crypto scene, there are a few algorithms worth knowing in more detail:
Ethash
Ethash is the proof-of-work algorithm for the Ethereum network, which supports the massively popular Ether coin. The system is relatively resource-intensive and may see changes in the near future as energy-efficient crypto trends become more popular.
CryptoNight
CryptoNight is a memory-hard hash function used by the Monero network and several other experimental blockchains. The algorithm is designed to be CPU friendly, opposed to the GPU-intensive protocols used by the Bitcoin and Ethereum blockchains.
Scrypt
Scrypt is known as a resource-heavy algorithm that makes mining particularly difficult for small operators. Dogecoin is one example of a Scrypt-based coin that has achieved popularity, but the system has mostly been abandoned as a legitimate blockchain mechanism.
The Algorithm Is Everything
The next time you’re browsing altcoins, fiddling with your mining rig, or just talking crypto with your friends, remember that the crypto algorithm is at the center of it all!
Without this brilliant technology and the ingenuity of Bitcoin’s creators, the speed and security of our favorite cryptocurrencies could not exist.
Keep learning more about crypto and the technology that powers it because there’s always more to discover.
Sources:
Cryptocurrency Mining Algorithms | Kunal Dhariwal Medium