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Analysis / Business

How Are Hash Functions Useful For Bitcoin?


Bitcoin is a complex, in-depth process that has many constituent parts. These multiple working parts are required to construct a currency that is public, marginally liquid, and secure. One of these key parts of the process is the hash function. Hash functions allow bitcoin users to keep their transactions private while also keeping a public list that connects bitcoins to those who own them.

Bitcoin continues to grow and succeed due to its ease-of-use and privacy. It makes transactions virtually anonymous, a major reason why it can be used for both positive and negative reasons. The process of bitcoin is also created by users, a process that brings in many enthusiasts and speculators alike.

At its heart, however, bitcoin is a form of currency locked into lines of code. It is a set of code that people can mine, buy, and sell. Bitcoin miners plug through millions of lines of code attempting to discover certain chains. Each transaction is public and listed in giant blockchains. The code that covers these blockchains is known as a hash function, and it is the secret to all of the benefits associated with bitcoin.

A hash function is a type of basic input-output function. The input can be any values, but the output has to be a fixed value. This combination is a form of encryption that can be easily used for passwords. Hash functions create a product, known as a hash digest, that may be a random selection of code. When a user creates a password, they plug that password into a hash function and the hash digest is stored.

The user has to input their password into the hash function and they are only granted access if the proper hash digest emerges as a result. Therefore, anybody hacking into a password database would only receive chunks of code in the form of the hash digest, instead of the actual passwords.

This encryption process is critical to hash functions and several aspects of the bitcoin process. Hash functions comprise the basis of the bitcoin mining process, which is the way in which new bitcoins are brought onto the market. A mining computer inputs all of the previous inputs from the blockchain of transactions into a hash function along with a new, arbitrary input. A computer does this millions of times until the hash function produces a number with a certain number of zeroes at the beginning.

This new output adds a block to the chain and delivers a specified number of bitcoins to the computer that achieved the new block. An algorithm determines the number of bitcoins that can be created during a certain period of time. The amount of bitcoins and the resulting difficulty of finding the required output of the hash function decreases as time goes on. This decrease keeps the value of the currency relatively stable.

Another key reason for hash functions is security of transactions. While transactions are public and added to the block chain, they are connected to a private key attached to every transaction. The conversion from the public blocks in the chain to the private key is performed using a hash function. In order to hack the currency, a hacker would have to gain access to the entire blockchain and manipulate the transactions so that they would be able to obtain coins.

However, that would mean hacking the private keys and matching them with the public transactions for every transaction. It would involve billions of different passwords being reverse-encrypted and then discovered. Such a process would be virtually impossible, meaning that the hash function and the multiple levels of encryption keep the extremely valuable system from being taken advantage of by hackers.

Bitcoin may seem arbitrary, esoteric, or so complex that it cannot be followed by the average person without a computer science degree. But new bitcoin millionaires are being made every day, and the currency is so popular that it is attracting investment and government regulation from all over the world. Understanding key parts of the bitcoin process, such as hash functions, may help the general public figure out ways in which this exciting new technology could improve their lives. Instead of fearing or ignoring bitcoin, they could use it to their advantage.

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Kevin Monk is a Financial Advisor with a great interest in budget planning and organising. He is also the founder of the website Retire By 37, where you can find advice personal finance, building wealth and practical financial tips.