Hashing Algorithm

What Is a Hash?

A hash is a mathematical function that converts an input of arbitrary length into an encrypted output of a fixed length. Thus, regardless of the original amount of data or file size involved, its unique hash will always be the same size. Moreover, hashes cannot be used to "reverse-engineer" the input from the hashed output since hash functions are "one-way" (like a meat grinder; you can't put the ground beef back into a steak). Still, if you use such a function on the same data, its hash will be identical, so you can validate that the data is the same (i.e., unaltered) if you already know its hash.

KEY TAKEAWAYS

A hash is a function that meets the encrypted demands needed to secure information.

Hashes are of a fixed length, making it nearly impossible to guess the hash if someone was trying to crack a blockchain.

The same data will always produce the same hashed value.

Hashes are one of the backbones of the blockchain network.

A hash is developed based on the information present in a block header.

How Hashes Work

Typical hash functions take inputs of variable lengths to return outputs of a fixed length. A cryptographic hash function combines the message-passing capabilities of hash functions with security properties. Hash functions are algorithms that determine how information is encrypted.

Converting it to binary

Creating hash values

Initializing constants

Chunking data into bits

Creating a message schedule

Running a compression loop

Modifying the final values

Hello: 185f8db32271fe25f561a6fc938b2e264306ec304eda518007d1764826381969

Hello world: 64ec88ca00b268e5ba1a35678a1b5316d212f4f366b2477232534a8aeca37f3c

Hello John: a8119595d77342cc73c93697a7f70920d3f4ded5d458e31907607e997ff76868

The function used to generate the hash is deterministic, meaning it will produce the same result each time the same input is used. SHA 256 can generate a hashed output in milliseconds with very little computing power, but it also makes determining the input difficult. This makes hashing ideal for securing cryptocurrency because it would take thousands of years to reverse the encryption to determine the original input with modern technology.

Hash functions are commonly used data structures in computing systems for tasks such as checking the integrity of messages and authenticating information. Cryptographic hash functions add security features, making detecting the contents of a message or information more difficult.

CRYPTOCURRENCY BLOCKCHAIN

What Is a Hash? Hash Functions and Cryptocurrency Mining

By JAKE FRANKENFIELD Updated February 12, 2023

Reviewed by AMILCAR CHAVARRIA

Fact checked by SKYLAR CLARINE

What Is a Hash?

A hash is a mathematical function that converts an input of arbitrary length into an encrypted output of a fixed length. Thus, regardless of the original amount of data or file size involved, its unique hash will always be the same size. Moreover, hashes cannot be used to "reverse-engineer" the input from the hashed output since hash functions are "one-way" (like a meat grinder; you can't put the ground beef back into a steak). Still, if you use such a function on the same data, its hash will be identical, so you can validate that the data is the same (i.e., unaltered) if you already know its hash.

Hashing is also essential to blockchain management in cryptocurrency.

KEY TAKEAWAYS

A hash is a function that meets the encrypted demands needed to secure information.

Hashes are of a fixed length, making it nearly impossible to guess the hash if someone was trying to crack a blockchain.

The same data will always produce the same hashed value.

Hashes are one of the backbones of the blockchain network.

A hash is developed based on the information present in a block header.

How Hashes Work

Typical hash functions take inputs of variable lengths to return outputs of a fixed length. A cryptographic hash function combines the message-passing capabilities of hash functions with security properties. Hash functions are algorithms that determine how information is encrypted.

For example, Secure Hashing Algorithm 256 (SHA-256) goes through a process to encrypt the input it receives by:

Converting it to binary

Creating hash values

Initializing constants

Chunking data into bits

Creating a message schedule

Running a compression loop

Modifying the final values

Using SHA-256, the word “Hello” will produce an output that is the same number of characters (64) as "Hello world" and “Hello John." However, the hash will be significantly different for all three—keep in mind that capital letters change the hash also:

Hello: 185f8db32271fe25f561a6fc938b2e264306ec304eda518007d1764826381969

Hello world: 64ec88ca00b268e5ba1a35678a1b5316d212f4f366b2477232534a8aeca37f3c

Hello John: a8119595d77342cc73c93697a7f70920d3f4ded5d458e31907607e997ff76868

The function used to generate the hash is deterministic, meaning it will produce the same result each time the same input is used. SHA 256 can generate a hashed output in milliseconds with very little computing power, but it also makes determining the input difficult. This makes hashing ideal for securing cryptocurrency because it would take thousands of years to reverse the encryption to determine the original input with modern technology.

Hash functions are commonly used data structures in computing systems for tasks such as checking the integrity of messages and authenticating information. Cryptographic hash functions add security features, making detecting the contents of a message or information more difficult.

In particular, cryptographic hash functions exhibit these three properties:

They are collision-free: This means that no two different input hashes should map to the same output hash.

They can be hidden: It is difficult to guess the input value for a hash function from its output.

They should be puzzle-friendly: It should be difficult to select an input that provides a predefined output. Thus, the input should be selected from a distribution that's as wide as possible.

Because of the features of a hash, they are used extensively in online security—from protecting passwords to detecting data breaches to checking the integrity of a downloaded file.

Hashing and Cryptocurrencies

The backbone of a cryptocurrency is the blockchain, which is a globally distributed ledger formed by linking together individual blocks of transaction data through hashing. The blockchain only contains validated transactions, which prevents fraudulent transactions and double spending of the currency. Cryptocurrency mining and validation involves working with this hash.

Solving a cryptocurrency hash starts by using the block header from the previous block as input and generating a hash. Each block header contains a version number, a timestamp, the hash used in the previous block, the hash of the Merkle root, the nonce, and the target hash.

The goal is to generate a hash that is equal to or less than the network's target hash. In the hash is a sequence of numbers called the nonce, or number used once. The mining program focuses on the nonce, which starts at zero in the first attempt. If the attempt fails, the program adds 1 to the nonce, and generates the hash again. It adds 1 to each failed attempt until generating a hash less than or equal to the target hash, then it is accepted as the solution.

Solving the hash requires the miner to continue trying to generate the right value, which requires a significant amount of trial-and-error. The miner who solves the hash is given the reward, and the block is added to the blockchain.

It is highly unlikely that a miner will successfully come up with the correct nonce on the first try, meaning that the miner may potentially test a large number of nonce options before getting it right. The greater the difficulty—a measure of how hard it is to create a hash that meets the requirement of the target hash—the longer it is likely to take to generate a solution.

What Is a Hash Function?

Hash functions are algorithms that transform or "map" a given set of data into a bit string of fixed size, also known as the "hash."

How Is a Hash Calculated?

A hash function utilizes complex algorithms that convert data of arbitrary length to data of fixed length (for instance, 256 characters). If you change one bit anywhere in the original data, the entire hash value changes, making it useful for verifying the fidelity of digital files and other data.

What Are Hashes Used for in Blockchains?

Hashes are used in several parts of a blockchain system. Each block header contains the previous block's hash, which ensures that nothing has been tampered with as new blocks are added. Cryptocurrency blockchains use hashes to secure information and make the ledger immutable.

The Bottom Line

In a cryptocurrency blockchain, a hash is a deterministic hexadecimal number. This means that no matter how many characters the input has, the hash will always be the same number of characters. For instance, Bitcoin's hashes are always 64 digits.

Hashes are used to secure information—in the case of cryptocurrency, they are used to ensure data contained in the blocks on a blockchain are not altered. The information encrypted by the hashing function is validated by network participants when they attempt to generate a hash less than the network target. Once the target hash is reached, the network closes the block—consensus is reached after the block closes because the network continues to validate transactions and block information after the hash is solved.

Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author does not own cryptocurrency.

What Is Proof of Work (PoW) in Blockchain?

Proof of work (PoW) describes a consensus mechanism that requires a significant amount of computing effort from a network of devices. The concept was adapted digital tokens by Hal Finney in 2004 through the idea of "reusable proof of work" using the 160-bit secure hash algorithm 1 (SHA-1).

Following its introduction in 2009, Bitcoin became the first widely adopted application of Finney's PoW idea (Finney was also the recipient of the first bitcoin transaction).

Proof of work forms the basis of many other cryptocurrencies, allowing for secure consensus.

KEY TAKEAWAYS

Proof of work (PoW) is a decentralized consensus mechanism that requires network members to expend effort in solving an encrypted hexadecimal number.

Proof of work is also called mining, in reference to receiving a reward for work done.

Proof of work allows for secure peer-to-peer transaction processing without needing a trusted third party.

Proof of work at scale requires vast amounts of energy, which only increases as more miners join the network.

Proof of Work Blockchains

Blockchains are distributed ledgers that record all bitcoin transactions, similarly to how you would enter transactions in a spreadsheet. Each block is similar to a cell. Information such as transaction amounts, wallet addresses, time, and date are recorded and encrypted into a block header—a hexadecimal number created through the blockchain's hashing function.

The hash from each block is used in the block that follows it when its hash is created. This creates a ledger of chained blocks that cannot be altered because the information from every block is included in the newest block's hash

Hashes

When a block is closed, the hash must be verified before a new block can be opened. This is where proof of work comes in. The hash is a 64-digit encrypted hexadecimal number. With modern technology, a hash can be generated in milliseconds for a large amount of data. However, miners try to guess that hash, which takes a very long time in computing terms.

Mining is the process of validating transactions by solving the hash and receiving a reward.

Nonce

The hash includes a series of numbers called the nonce, short for "number used once." When a miner—the program on a node that works to solve the hash—begins mining, it generates a hash from publicly available information using a nonce equal to zero.

Solving the Hash

If the hash is lower than the current network target, the miner has successfully solved the hash. The network target is a mathematical result of a formula converted to a hexadecimal number that dictates the mining difficulty.

If the hash is greater than the target, the mining program adds a value of 1 to the nonce and generates a hash again. The entire network of miners tries to solve the hash this way.

On the Bitcoin blockchain, the miner that solves the hash is given the current reward for the work done.

Proof of Work vs. Proof of Stake

The two most popular consensus mechanisms are proof of work and proof of stake. Bitcoin's top competitor Ethereum used proof of work on its blockchain until September 2022, when the highly-anticipated transition to proof of stake was made. Here are some of the key differences between the two.

Proof of Work

Validation is done by a network of miners

Bitcoin paid as a reward and for transaction fees

Competitive nature uses lots of energy and computational power

Proof of Stake

Validation is done by participants who offer ether as collateral

Ether is paid for transaction fees only

Less computational power and energy used

Special Considerations

Mining is a competitive process, so it has become a race between those with the most computational power. So, miners join pools to increase their chances of receiving a reward because it takes an enormous amount of computing work to be competitive.

On Feb. 9, 2023, the mining pool FoundryUSA accounted for nearly 32% of the Bitcoin network's three-day hashrate—the number of hashes a network can perform per second. FoundryUSA hashed 89.81 exa hashes per second (EH/s)—the pool generated nearly 90 quintillion (90 x 1018) hashes per second.

Single or individual PoW miners are not able to compete with pools for rewards.

Proof of work is also known for its energy consumption. The University of Cambridge tracks the Bitcoin network energy demand and uses a "best guess estimate" to determine its usage. The network uses as much energy as some small countries; however, it's important to note that industrial data networks and data centers use far more energy than the Bitcoin network.

Proof of work is also a much slower validation method than other mechanisms. For example, more transactions are taking place than the Bitcoin network can handle. Transactions are stored in a mempool waiting for validation, with average confirmation times between Jan. 1 and Feb. 9, 2023, ranged from seven to 91 minutes (confirmation is when your transaction is confirmed).

Bitcoin keeps its block times at an average of 10 minutes—compare this with block times on the Ethereum PoS network, which have averaged 12 seconds since September 2022.

Example of Proof of Work

Proof of work requires a computer to randomly engage in hashing functions until it arrives at an output with the correct minimum amount of leading zeroes. For example, the hash for block #775,771, mined on Feb. 9, 2023, is:

00000000000000000003aa2696b1b7248db53a5a7f72d1fd98916c761e954354

The block reward for that successful hash was 6.25 BTC and 0.1360 BTC in fees.

The nonce was 2,881,347,934, there were 1,519 transactions in the block, and the total value of the block was 1,665.9645 BTC. Remembering that a hash is generated and the nonce starts at zero, this block was hashed by a miner 2.8 billion times before reaching a number less than the target.

What Does Proof of Work Mean?

PoW requires nodes on a network to provide evidence that they have expended computational power (i.e., work) to achieve consensus in a decentralized manner and to prevent bad actors from overtaking the network.

Why Do Cryptocurrencies Need Proof of Work?

Because they are decentralized and peer-to-peer by design, blockchains such as cryptocurrency networks require some way of achieving both consensus and security. Proof of work is one method that makes it too resource-intensive to overtake the network. Other proof mechanisms also exist that are less resource-intensive. Without a proof mechanism, the network and the data stored within it would be vulnerable to attack or theft.

Does Bitcoin Use Proof of Work?

Yes. It uses a PoW algorithm based on the SHA-256 hashing function to validate and confirm transactions and issue new bitcoins.

The Bottom Line

Proof of work is a consensus mechanism used by many cryptocurrencies to validate transactions on their blockchains and award tokens for participating in the network. Proof of work is a competitive process that uses publicly available transaction information to attempt to generate a hexadecimal number less than the network target for that mining period. Under PoW consensus, thousands of mining programs work on one block until the hash is solved, then move to the next block.

Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author does not own cryptocurrency.