"Cryptocurrency," as the name implies, involves the use of encryption. The first cryptocurrency, Bitcoin, combines transparency with privacy through encryption. Although transaction data on the blockchain can be easily verified at any moment, the data associated with specific individuals is not as straightforward because of data encryption.
Different cryptocurrencies employ various strategies to ensure privacy, but encryption and the use of hash functions remain integral components in the architecture of digital currencies. This article discusses the role of hash functions in cryptocurrencies and blockchain, provides a definition of the hash function, and answers questions such as how to calculate a hash and what hashing is.
- What Is a Hash and How Does It Work?
- Hashing and Cryptocurrencies
- What Is a Hash Function?
- How Is a Hash Calculated?
- The Term’s History
What Is a Hash and How Does It Work?
A hash is a mathematical function used to encrypt data of any length and align its size with specific requirements. If the same hash function is used for several different data pieces that vary in size or length, they will all be transformed into strings of equal length.
The hashing process is unidirectional. It's impossible to retrieve the input data using the hashed output. This property provides strong data encryption. Another key aspect is that each function operates consistently. If you apply the same function to the same data piece twice, you will generate two identical hashes.
This feature makes hash functions useful for validating data input through their encrypted output, making hashing a crucial part of cryptocurrency. The block header's data serves as the basis for the string of characters known as a hash.
Bitcoin's encryption algorithm, called SHA-256 (Secure Hashing Algorithm), provides a good example of how data encryption works. Let's compare the encrypted words "SHA-256," "SHA-257," and "encryption algorithm."
As you can see, almost identical words "SHA-256" and "SHA-257" were turned into hashes that have little to nothing in common. All the hashes have the same number of characters – 64. Furthermore, the output of the longer phrase "encryption algorithm" has the same number of characters as the shorter "SHA-256" and "SHA-257." Any attempts to decrypt these strings of characters are in vain.
Hash functions also offer a unique feature: different inputs will never yield the same hash. This feature makes hash functions handy for verifying private data (like hashed fingerprints). Moreover, hashes are used for checking the integrity of downloaded files, preventing data leaks, securing passwords, and more. One of the advantages of hash functions is that they require minimal storage space.
Hash functions have also proven instrumental in addressing password storage issues for websites. For security reasons, passwords should not be accessible to website staff and should not be stored on the website's servers. Hashes have provided a solution to this challenge, with website parties only dealing with hashed passwords. Hashes cannot be decrypted, and they serve the vital function of verifying the authenticity of the entered password. Think of it like a bank vault. Your password is stored inside, and even the bank (in this case, the website staff) can't see or access it. All they can see is the unique 'fingerprint' the vault (the hash) gives off.
Hashing and Cryptocurrencies
Before the crypto revolution, many people interacted with hashes while using torrent clients. When Bitcoin gained prominence, the terms "hash" and "hashing" became part of the cryptocurrency vernacular.
In cryptocurrencies, hashing performs several vital roles. It secures the network from malicious activity (e.g., double spending), maintains the pseudonymity or anonymity of transactions and addresses recorded in the ledger, and protects passwords.
Hashes are used to confirm the authenticity of data recorded on the blockchain, thanks to the unique output of each encrypted data input. All data on the blockchain is hashed. Any data manipulation will be reflected in the hash and alter the records. Unless someone controls over half of the blockchain's hashing power - a very unlikely scenario - the network stays secure, and any fraudulent transactions or attacks are likely to be stopped.
The data on a blockchain is organized via two vital elements: pointers and linked lists. Each pointer is a variable pointing at other variables, including the next block in the blockchain. A series of such pointers lead to the correct destination. Linked lists create a sequence of nodes connected through pointers.
Hashes serve as identifiers for each block and are recorded in the immutable ledger. Bitcoin block headers contain identification data. This data includes the blockchain's version number, a UNIX timestamp, the target hash, the previous block's hash, the hash of a Merkle root, and a nonce that indicates the value miners should achieve to create the block. These elements are assigned before the block is created. The input used for the new hash is the latest block's header data. Once the data is hashed, the encrypted output is added to the block as a hash string.
The hash should not exceed the network's target hash. Mining software works with the nonce. It starts with a zero. If the miner fails to guess the correct hash, the attempt is repeated, and the software adds 1 to the nonce. Each subsequent attempt adds another "1" to the nonce until the hash reaches the target hash (or it can be less than the target hash) value. At this point, the block is "found" and added to the blockchain, and the miner who solved the correct hash receives a block reward.
What Is a Hash Function?
A hash function is a mathematical function that converts data input of any size into an output in the form of a bit string of a specified size. Some hash functions support variable output sizes.
For efficient functioning, a hash function should meet the following requirements:
- The hash computation time should be near-zero.
- The hash should avoid collisions, meaning that the outputs of two different inputs should never coincide.
If these requirements are not met, the service using these hash functions will likely perform poorly. It will be slow, making it uncomfortable to use, and in some critical situations, it could be disastrous far beyond a simple inconvenience. Simultaneously, the collision of the output data could ruin the entire user experience, as it creates the probability of critical errors.
How Is a Hash Calculated?
Hash functions transform data similar to a complex puzzle. It involves several steps, each adding an extra layer of complexity, much like solving a multi-step equation in math. For example, SHA-256 encryption involves seven steps: converting the data into a binary form, adding hash values, initializing constants, splitting the output into pieces, setting the message schedule, compressing the data, and finally, modifying the output values. This is how the hash used for the Bitcoin network is created.
The Term’s History
The word "hash" is used in mathematics due to an analog with its original meaning – chopping something up. In this case, the input data is the subject being chopped up. The first known use of the term "hash function" dates back to Herbert Hellerman's book "Digital Computer System Principles" in the 1960s. However, professionals were using the term long before this publication.
In cryptocurrencies, hashing is a fundamental process. The very name "cryptocurrency" suggests that encryption plays a crucial role in the structure of digital money. Bitcoin's elegant architecture has been ensuring this network's security since day one.
The use of hash functions has proven to be a key element in the foundation of other cryptocurrencies. While the end-user of cryptocurrency apps with neat graphic interfaces might not interact with hashes daily, hash functions still make this industry possible.