Home Glossary
Bybit Learn
Bybit Learn
Beginner
Aug 12, 2022

Algorithm

An algorithm is a finite sequence of instructions used to perform a calculation or to process data. These instructions must be completed in a specific order to produce the desired result.

What Is an Algorithm in the Crypto World?

The cryptographic algorithm is a simple version of the hashing algorithm, which is a mathematical function that takes information and turns it into a complex but secure form of output data. Many people refer to these outputs as cryptographic hashes, which become the "fingerprints" or signatures of the data. If you want to compare two data sets, the information is run through the same algorithm in a process known as hashing.

Cryptocurrencies use various hashing algorithms. The hash is a number generated from a string of text. Each cryptocurrency uses a specific encryption algorithm that contains an encrypted data string. The currency units are monitored and organized by a peer-to-peer (P2P) blockchain, which acts as the secure ledger for the transactions. 

The blockchain validates a cryptocurrency's coins, and the algorithm helps maintain the ledger's security. As the blockchain grows, so does the list of records, known as a block.

Algorithms are vital to crypto mining. During this process, “miners” update and verify transactions on the blockchain. To do so, the miner must solve a complex mathematical problem, a process known as finding a hash, to validate the block. Once this is done, the validated block is added to the blockchain permanently. The blockchain stores information about the previous block's hash, the transactional data, and the number of coins received by the miner. In return, the miner receives coins. The miner’s efforts to verify the transaction often results in newly minted coins and transaction fees for the cryptocurrency.

Crypto mining ensures that a blockchain functions correctly. Cryptocurrency algorithms are a set of cryptographic mechanisms that help to encrypt digital currencies. The process of coin mining, or decrypting, turns random data into ordered information, helping maintain the blockchain's security.

Types of Algorithms

There are many types of algorithms in the cryptocurrency world, each playing an important function. You can find three classes of cryptographic algorithms approved by the NIST. They are identified by a particular type or number of cryptographic keys. Here's a look at them.

Hash Function

For its basic operation, a cryptographic hash function doesn’t use keys. Instead, this function creates a hash value which contains large amounts of data. You can use hash functions in key management to create building blocks. Also, they help to provide some security services. 

When there’s a need to generate and verify digital signatures, hash functions compress them. By generating message authentication codes (MACs), hash functions provide authentication services. In addition, these hash functions generate deterministic random numbers and derive keys to these key-establishment algorithms.

Symmetric Key Algorithm

Symmetric key algorithms are also called secret key algorithms. They transform data, making it almost impossible to view without a secret key. Individuals use symmetric key algorithms for both encryption and decryption. Many of these keys are known by several authorized parties. The algorithms can also provide MACs (above) for source attribution. 

Symmetric key algorithms keep data confidential, since the same key is used for encrypting and decrypting data. Symmetric key algorithms generate deterministic random numbers and establish keys during the key establishment processes.

Asymmetric Key Algorithm

Asymmetric key algorithms are known as public key algorithms. They use paired keys, consisting of a public and private key, to perform their tasks. A public key is known to several parties, but the owner controls the private key. This private key cannot be calculated by the public key, even when they’re cryptographically related. 

Algorithms play a vital role in verifying transactions and maintaining the security of blockchains. Without them, crypto mining wouldn’t be possible. Additionally, the blockchain would be rendered unstable and prone to security breaches.