Cryptocurrencies like Bitcoin (BTC) don’t benefit from relying on cybersecurity experts or cloud computing companies to secure their networks. Instead, these decentralized digital assets need rock-solid software to post block after block of transactions without the help of third parties or centralized authorities. So how do cryptocurrencies attempt to ensure accurate digital transfers on their payment ledgers while maintaining decentralization?
Crypto projects have access to many tools to ensure the data integrity of their systems, but cryptographic hash functions are one of the most fundamental concepts to grasp. In fact, these are often regarded as one of the essential features of online privacy. Even if someone has never transferred virtual coins like Bitcoin or Ethereum (ETH), they probably rely on cryptographic hash functions every day, whether they realize it or not.
Below, we’ll explore digital security and why it’s key to understanding how cryptographic hash functions—and their most common applications—operate.
What Are Cryptographic Hash Functions?
Cryptographic hash functions are special programs that convert digital data into strings of seemingly random codes. These functions use preset algorithms to produce a unique code for each piece of information put through a hashing application. In computer science terminology, cryptographic hash functions transform “input values” like password data or cryptocurrency transactions into “output values” (aka message digests) with strings of letters and numbers.
Although the outputs look arbitrary, they must meet a preset number of tiny increments called “bits.” For example, the SHA-256 hash algorithm always produces digests with 256 bits. This uniform size helps computers quickly verify the hashing function used to create each output, allowing PCs to determine the associated input values. Without a fixed size for cryptographic hash functions, programs can’t recognize digests, making it impossible to use hash functions for any meaningful application.
Also, just because hash outputs have a fixed length doesn’t mean they’re identical. After all, if every hash value were the same, there would be no way to distinguish the different input data. To solve this problem, cryptographic hash functions create a distinct identifier for each input value. For instance, if a website secures users’ passwords using hashing functions, each user will have a different set of letters or numbers in their “hash” associated with their account. No two hash values are the same, which helps preserve the cryptographic hash function’s security. Whenever a user signs into their account with their unique password, the hashing function always generates the same output value to verify the person’s distinct identity. In this sense, it’s helpful to think of cryptographic hash functions similar to using biometric traits like eyes, palms, or fingerprints to unlock an online account.
What’s the Purpose of Cryptographic Hash Functions?
Cryptographic hash functions are among the most secure ways to protect and preserve digital data. Since every hashing output has unique and complex alphanumeric combinations, they offer an exceptionally safe and fast way to verify if online information matches each user. Plus, cryptographic hash functions are “one-way” operations, meaning hackers can’t figure out the input value using the output code. All these features enable deriving an infinite amount of input data without risking user privacy and security. The reliability, speed, and intricacy of cryptographic hash functions make them a preferred encryption technology for sensitive online information, especially for storing passwords and virtual files.
Are Cryptographic Hash Functions the Same as Key Encryption?
Hashing algorithms belong to a cybersecurity category called “cryptography,” but there are other ways computer scientists protect online data. For instance, many online programs use cryptographic programs with special algorithms known as “keys.” The goal of key encryption is the same as cryptographic hash functions, except the former heavily relies on users having the correct algorithmic key to decipher sensitive data. For context, in a symmetric cryptographic system, only users with a shared key can access the info sent between each other. Asymmetric cryptography, on the other hand, relies on two sets of keys—public and private—to provide additional security. The public key serves as a kind of “home address” people use to receive messages, but only the private key gives users privileged access to this data.
Although cryptographic hashing functions and key-based encryption are different cryptography forms, there are cases where online protocols use both systems. For example, cryptocurrencies like Bitcoin use asymmetric cryptography to generate public and private keys for digital wallets and hashing functions to process transactions.
What Are the Features of a Cryptographic Hash Function?
There are dozens of secure hash algorithms used in cryptography, each with different properties tailored for specific applications. For example, some hashing algorithms like SHA-1 are known for their speed, while others like SHA-256 are renowned for their robust security. No matter which hashing algorithm developers use, they typically have a few essential characteristics.
Deterministic outputs: A cryptographic hash function must produce the same length of bits in digests for every input value. No matter how long or short the input is, the resulting output must meet the standard set by its algorithmic program.
One-way values: If hackers know how to figure out an input from a hashing digest, it’s not a secure system. Developers won’t take a cryptographic hashing function seriously if there are easy ways to derive the input value from the output.
Collision resistance: When a cryptographic hash algorithm produces two of the same outputs from different inputs, it’s called a collision. Just as when two cars crash on the road, a hashing collision is a catastrophe that often invalidates the algorithm’s integrity. In this case, bad actors can create false hash values with malicious code mimicking safe inputs.
Avalanche effect: Even a tiny shift in an input has an “avalanche-sized” impact on a hashing algorithm’s output. For instance, if a user adds spaces to their passwords, the hashing algorithm generates indistinguishable digests versus hashing passwords without spaces. These significant changes between hashing outputs help protect, organize, and verify limitless inputs.
How do Cryptographic Hash Functions Work With Cryptocurrency?
Cryptocurrencies use the determinacy and verifiability of cryptographic hash functions to confirm every transaction on their public payment ledgers. On the Bitcoin blockchain, for example, transaction data first undergoes a cryptographic hash function called SHA-256 to produce a unique output with 256 bits. To verify this data, nodes on the Bitcoin network need to use their computer power to generate input values until they arrive at an output with a certain number of zeros in its opening phrase (aka proof-of-work mining). The first node to successfully create an output value with the number of leading zeroes gets to post the new transaction on the public payment ledger and receive crypto rewards. Bitcoin’s protocol automatically adjusts the number of zeroes required to post new transactions every 2,016 blocks according to the total computing power on the network.
In addition to confirming transaction data, cryptographic hash functions create safe crypto wallet addresses. Specifically, crypto wallets use hashing algorithms to generate a wallet’s public key from its private key. Since cryptographic hash functions only go one way, hackers can’t determine a wallet’s private key using the public key. The encrypted authentication of cryptographic hash functions enables people to receive cryptocurrencies on peer-to-peer (P2P) blockchains without worrying about revealing their sensitive private keys.
Learn More About Cryptocurrency on dYdX
Learning the fundamentals of cryptography and blockchain technology helps you better understand why cryptocurrency is a separate asset class with distinct traits versus fiat currencies. To explore more about the tech behind virtual currencies as well as our product, check out dYdX’s blog. Also, head to our Academy to read up on crypto content. We have a wealth of articles on topics such as decentralized wallets, buying power, and Bitcoin dominance.
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