Data security has emerged as perhaps the most paramount concern in the digital world. At the time of this writing, there are over 10,000 different cryptocurrencies with a total market capitalization hovering at 900 billion USD. With so much money at stake, secure, tamper-proof transactions are critical. Blockchain or crypto hashing is the key to achieving this. Let’s explore what hashing is, how it works, and the importance of hash functions for transaction security.
Crypto Hashing Past and Present
The word hash originates from the 14th-century French verb, hasher, meaning to chop up. The etymology is particularly relevant to hashing algorithms where a digital piece of data is “chopped” up into a small, fixed-size output.
Jump ahead six centuries to 1979 when the concept of a hash function was first formalized by cryptographer Ralph Merkle. Merkle, who is also credited with developing public-key cryptography, wanted to create a way to verify the authenticity and integrity of data stored electronically. The idea was simple: take some digital data, run it through a mathematical algorithm, and out pops a checksum. The algorithm is designed such that it is very difficult to generate the same checksum for two different pieces of data. This property is known as collision resistance.
How Does Crypto Hashing Work?
Hash data provides the benefit of one-way data binding. That is, it is computationally very difficult to derive the original data from the hashed value. A hash function is any algorithm that takes some arbitrary input data of any size and maps it to a string of fixed length. This string is typically referred to as a “hash value,” “message digest,” or simply a “digest”. Hash functions are a fundamental part of modern cryptography. They are used in digital signatures, message authentication codes and many other security applications.
For example, the Secure Hashing Algorithm 256 (SHA-256) hash function will always output a 256-bit (32 byte) hash value regardless of the input data size. Hash values are typically expressed in hexadecimal notation. SHA-256 will always produce the following 256-bit hash of the word cryptocurrency:
As you can see, the value is 64 bytes=32 bytes=256 bits in length.
However, changing the spelling of cryptocurrency to criptocurrency yields the following result:
Here, the length of the string is identical but the value is completely different, proving the avalanche effect: that a small change in input outputs a completely distinct string.
The most important properties of a good hash function are:
- Deterministic: The same input always produces the same output
- Unpredictable: Very difficult to predict the output for a given input
- Non-invertible (one-way): Computationally infeasible to determine the input given the output
- Collision-resistant: Extremely difficult to find two different inputs that produce the same output
- Avalanche effect: A small change in the input should produce a significant change in the output
The Importance of Hash Functions for Crypto Transaction Security
Cryptocurrencies use a distributed ledger system, which means that transactions are recorded on a public blockchain. This offers many advantages in terms of transparency and security, but it also poses some challenges. One of the biggest challenges is ensuring that transactions cannot be tampered with once they have been recorded on the blockchain.
This is where hash functions come in. Every transaction that is recorded on the blockchain is first hashed using a cryptographic hash function. This generates a unique fingerprint that can be used to verify the authenticity of the transaction.
If someone tries to tamper with the transaction, even just a small change will result in a completely different hash value. This means that it is immediately obvious if a transaction has been tampered with.
Hash Functions and Blockchain Data Structure
Hash functions are an essential part of blockchain transaction security. They help to ensure the integrity of data and prevent tampering. They also make it possible to generate digital signatures, which provide authentication and non-repudiation. Hash functions are an essential part of blockchain technology and are what makes it so secure.
The main elements of a block in a blockchain are:
- The data is stored or transmitted
- A cryptographic hash of the previous block in the blockchain
- A timestamp
- A nonce value
The data stored or transmitted is typically referred to as the “message.” The cryptographic hash of the previous block is called the “parent hash.” The timestamp is used to track when the block was created. The nonce value is a number that is used to help prevent “replay attacks”. A replay attack is where an attacker tries to reuse a cryptographic hash in order to tamper with the data in a blockchain.
The cryptographic hash function is used to generate a digest of the message. This digest is then combined with the parent hash, timestamp, and nonce value to create the block header. The block header is then hashed again to produce the final block hash. This final hash is what is used to validate the authenticity of the block.
The data structure is composed of blocks that hold individual transactions. Each block contains a cryptographic hash of the previous block, a timestamp and transaction data. The first block in the chain is known as the genesis block. A genesis block differs from other blocks in that it does not have a previous block to reference. The genesis block is typically hardcoded into the software used to create the blockchain.
The use of cryptographic hash functions provides a way to verify the authenticity of data stored in the blockchain and prevent any tampering with the data. By using a chain of blocks, it is possible to create a secure, tamper-proof ledger of all transactions that have taken place.
How Does Hashing Work in Cryptocurrency?
In cryptocurrency, hashing is used for two main purposes: to generate a unique identifier for each transaction and to secure the network through Proof of Work. Let’s take a closer look at both applications.
Each transaction in a cryptocurrency network is identified by a unique alphanumeric string, known as a transaction hash or transaction ID (TXID). This hash is generated by running the transaction data through a hashing algorithm. Importantly, each transaction hash is unique and cannot be predicted in advance. As such, it can be used to verify the authenticity of a transaction.
In addition to serving as a transaction identifier, the TXID is also used to generate a checksum for each block of transactions. This checksum, known as a Merkle root, is stored in the block header and is used to verify the integrity of the entire block. To generate the Merkle root, the transaction hashes are first arranged in a binary tree. The hash of each leaf node (transaction) is then combined with the hash of its sibling to generate a new hash, which becomes the parent node. This process is repeated until there is only one node remaining, known as the Merkle root. Any change to even one transaction in the block will cause the entire Merkle root to change, making it easy to detect tampering.
Proof of Work
The Proof of Work model is the most common form of consensus mechanism used in blockchain networks. It is a process by which nodes in the network validate transactions and add them to the blockchain. The key characteristic of proof of work is that it makes it computationally difficult for bad actors to manipulate the transaction history, as they would need to redo the entire proof of work process. Miners compete to be the first to solve a cryptographic puzzle, known as a hashcash. The winning miner is rewarded with newly minted bitcoins and fees from transactions included in the block.
Solving the puzzle requires a miner to find a nonce value that produces a valid hash. The difficulty is adjusted by changing the number of zeros that must be included in the hash. The target difficulty is such that it takes an average of 10 minutes to find a solution.
For example, if the current difficulty is set to include four zeros, then a valid hash would look something like this: 00009f2d7b5dc1cefdf29fc05a74ab86. If the number of zeroes is increased to five, then a valid hash would look like this: 000006dca70f31a9625eaaf4e36dd63c.
Proof of Stake
Ethereum uses a Proof of Stake process, but rewards miners with ether, the native cryptocurrency of the Ethereum network. In addition to transaction fees, miners are also paid a block reward, which is currently set at 3 ether.
Proof of stake is an alternative to proof of work in which node operators are chosen to validate transactions based on the number of coins they hold. The more coins a node has, the greater its chances of being chosen to validate a block of transactions. Importantly, proof of stake does not require expensive mining hardware, making it more environmentally friendly than proof of work.
Understanding Hashing Is the Key to Blockchain Fundamentals
The properties of the hashing function are fundamental to blockchain technology. Hashing algorithms generate unique IDs, guarantee data integrity and are integral to establishing consensus through Proof of Work. Our team at TransitNet is taking ownership verification to a new level with innovative tools for cryptographic assets. Contact us now to become part of our new product launch.
Ethereum – Proof of Stake
Bitcoin Wiki – Hashcash
Investopedia – Proof of Work
Sectigo Store – SHA 256 Algorithm Explained by a Cyber Security Consultant
Etymonline – Hash
Yahoo Finance – Crypto market cap teeters above $900B as bitcoin falls
Statista – Number of cryptocurrencies worldwide from 2013 to February 2022