Making Crypto Secured: Cryptocurrency Hashing

The cryptocurrency market is decentralized. Its value and all transactions are not managed by central authorities like central banks or the government.

While this is a turn-on for most financial markets, it poses a challenge to the integrity and security of the crypto market. Its lack of regulatory protection has made it susceptible to several illicit activities from scam companies.

However, thanks to technological advancement, the crypto market has found functions that make all crypto transactions verified, tamper-proof, and secure. In this lesson, you'll walk through the important security infrastructure of cryptocurrency: Crypto Hashing.

 

Lesson Highlights:

• Cryptocurrency has been in the market since the introduction of Bitcoin in 2009. However, it had difficulty penetrating the financial market due to challenges like skepticism and distrust from traditional financial institutions and regulators.
• The crypto market has developed a security infrastructure to ensure the integrity and privacy of all crypto transactions.
• One effective way to conceal all personal and sensitive transaction details is by hashing.

 

Cryptocurrency: What It Is and How It Works

All cryptocurrencies are digital; they don't have any physical form. They're literally just a combination of computer code lines known as cryptography. That's their key difference from the fiat currencies like USD, EUR, etc.

With everything made digital, cryptocurrencies are now used more than just as a security asset for your investment. Today, cryptocurrency is being used as a medium of exchange; you can now buy or sell regular goods and services using digital coins.

However, the concept behind the crypto operation can be a tad bit complex. But don't fret; I'm here to simplify it for you.

Bitcoin, Ethereum, and other cryptocurrencies operate on a decentralized network, meaning there's no central authority controlling all their transactions.

Instead, transactions are verified and recorded by a distributed network of computers called nodes. Node is part of the blockchain network that records all the cryptocurrency transactions.

Assume you want to send a crypto to your seller. That crypto transaction is validated and broadcasted to the blockchain by nodes. This cryptographic technique is used to ensure a legitimate transaction.

However, here presents the privacy issue of blockchain. If all the transactions are accessible across the blockchain network, it simply means your information is readily available to anyone using the same network.

To battle this challenge, the mathematical operation called hashing is used to create and maintain crypto transactions.

 

What is Hashing 

Hashing is a mathematical operation that generates a fixed-size output from input data of arbitrary length using a hash function.

In its most basic form, a hash function is an algorithm that converts all data with any length into a unique string of fixed-length text.

Assume you want to have the whole novel of Harper Lee's 'How To Kill a Mockingbird' hashed. What you need to do is input the entire text into a hash function, which then generates a unique fixed-length value.

While each input (such as different novels or pieces of text) produces a distinct hash value, these hash values are always of the same fixed length determined by the certain hash function.

However, you should know that there are different functions in computer science.
Popular hash functions include; 

1. Secure Hash Algorithm 1 (SHA-1) creates a hash value of 160-bit 
2. Secure Hash Algorithm 256 (SHA-256) generates a 256-bit hash value 
3. Message Digest Algorithm 5 (MD5) produces a hash value of 128-bit. However, this function is less secure due to its vulnerability to collisions.

 

Hashing and Cryptocurrency 

In the context of cryptocurrency, hashing is a cryptographic technique that conceals any clues about what the input may have looked like. Essentially, it's a crypto function that secures all recorded transactions and protects the privacy of the parties involved.
 

Hashing creates a crypto fingerprint 

Let's address this first: All crypto transaction details are unique. Your transaction details differ from your friend's, and the details of your one transaction are also completely different from your other one.

Think of hashing as creating a digital fingerprint for each crypto transaction. Just as each person has a unique fingerprint, each transaction has its own distinct digital fingerprint.

Sounds confusing? Assume your input is, "Hello, I'm a new crypto trader."

Now, you input it in the SHA-1 function, it then generates a hash of "ef3b990de087b56be8bb762fd18d69414c39a730"

Every time you generate a SHA-1 hash with the same input, it will always give you the same hash value.
 

Input Hello! I'm a new crypto trader.

SHA-1 Function

Output ef3b990de087b56be8bb762fd18d69414c39a730

However, if you change something to your input, regardless of how tiny the changes are, the SHA-1 hash will be completely different.

Imagine you change the comma sign to exclamation point after Hello, transforming your input into "Hello! I'm a new crypto trader."

With this new input, you'll have an SHA-1 hash value of "42dd52bfd7e3c7467a0c71ff19b02ab72cc465cd"

Essentially, the moment you change anything in your input, the output or the hash value of the modified input will be completely different from the previous one.
 

Input Hello! I'm a new crypto trader.

SHA-1 Function

Output 42dd52bfd7e3c7467a0c71ff19b02ab72cc465cd

With this function being used in recording cryptocurrency transactions, you can rest assured that your transaction details, including your personal and investment information, are not displayed and are publicly available on the accessible blockchain network.
 

You can't use the hash (output) to reveal the input

Hashing is a one-way road, and there's no way you can use the hash value to decipher the input data behind the hash output.

This tamper-proof function makes hashing an effective and ideal security infrastructure for cryptocurrency.
 
Throughout this lesson, you’ve learned the basics of hashing and how it’s used to protect the integrity of the cryptocurrency market. For the next lesson, let’s look at how a block of cryptocurrency is created through mining.