hashing algorithm is a mathematical algorithm that converts an input data array of a certain type and arbitrary length to an output bit string of a fixed length. Hashing algorithms take any input and convert it to a uniform message by using a hashing table.

Hashing is a critical aspect of cryptocurrency, as the security-and efficiency-that it affords to the blockchain are two of its most defining characteristics.


Hash algorithms were a breakthrough in the cryptographic computing world. This special type of programming function is used to store data of arbitrary size to data of a fixed size. Hash functions were created to compress data to reduce the amount of memory required for storing large files. The hashes they create can be stored in a special data structure called hash tables, which enables quicker data lookups. 

The core reason for hash functions arose from the need to compress content, but the unique identifiers of hash values soon became a staple of simplicity in database management. No two hash inputs should ever return the same hash, but instead create singularly unique identifiers for each hash input. When two different hash inputs return the same output hash, it is called a collision

While hash functions were created to help speed up database upkeep, the utility of hashing algorithms evolved dramatically. A more extensive family of hash functions were created with privacy, security and transparency in mind. We will now explain and look deeper into this special family of hash functions, called “Cryptographic Hashing Algorithms”.

How Does Hashing Work?

Hashing, in the context of cryptocurrency, is the process of computing a “hash value” from plain text in order to protect against interference.

The following are 32-byte hash values produced by a SHA-256 hash calculator:

Displays inputs of various messages to illustrate differences in hash outputs.

Notice how single changes in capitalization produces an entirely different string of characters. In fact, analyzing each output in comparison with another underscores the complexity of the SHA-256 algorithm.

Hash functions take data as an input and returns an integer in the range of possible values into a hash table. To do this repeatedly, there are four key components of a hash algorithm:

The hash value is fully determined by the input data being hashed. 

The hash function uses all of the input data.

The hash function consistently distributes the data across the entire set of possible hash values. 

The hash function generates completely different hash values even for similar strings. 

These four components are what make hash algorithms work. Every hash algorithm will do this in some form or another. To illustrate further on what a hash function is and what it does, we will look at specifically the three most critical functions of a hash algorithm below. 

What is a Hashing Function?

Hash functions differ by type; however, there are several characteristics that persist between them.

Deterministic: The hash value remains the same. No matter how many times you input a message into the hashing function you need to receive the same output. The deterministic nature is key to creating order within the system utilizing the hash function. 

Quick Computation: For a hash function to be used for real-world applications there needs to be efficient computation for any given message. The hashing function should quickly return a hash value for any potential given message.

Irreversible: There is no reverse engineering; messages cannot be re-traced from the hash output. It is impossible for an input to be regenerated from its hash value. The hash algorithm is designed to be a one-way function so if the hash function can be reversed then it is deemed compromised and no longer viable for storing sensitive data.

Numerous hashing algorithms have been developed throughout the course of digital forensics, of which some of the most prominent include: 

  • Message Digest 5 (MD5)

No longer actively used, MD5 was one of the most common hashing algorithms in early cryptography. Because of its several vulnerabilities, including the frequency of collisions, no cryptocurrencies make use of the 128-bit outputs. 

  • RSA

Named after its designers (Rivest-Shamir-Adleman), RSA is a cryptosystem that originated in the late twentieth century. RSA uses a simple method of distribution: Person A uses Person B’s public key to encrypt a message and Person B uses a private key, which remains secret to the user, to uncover its meaning. No active cryptocurrencies use the RSA framework.

  • Secure Hash Algorithm (SHA)

Secure Hash Algorithm (SHA) is a family of cryptographic hash functions that are used by most cryptocurrencies. This family of cryptographic hash functions were developed by the National Institute of Standards and Technology. Each hashing algorithm released under the SHA family builds upon the last version and since 2000 there has not been a new SHA algorithm released. SHA-384 is used to protect NSA information up to TOP SECRET. Consider this one of the most secure hashing algorithms.

  • Scrypt

This hash function is computationally intensive which by design takes relatively longer time to compute. Due to the time complexity of the hash algorithm and the big memory volume required, Scrypt hash algorithm is very secure. Litecoin is the most popular cryptocurrency that uses Scrypt to secure its blockchain. 

  • Ethash

Ethash is a proof-of-work mining algorithm created and implemented by the Ethereum network. This hash algorithm was developed to meet three main concerns in the cryptocurrency community: ASIC-resistance, light client verifiability and handling full chain storage. Vitalik Buterin is credited with helping create this hash algorithm.

Which Algorithm Does Bitcoin Use to Hash Blocks?

Bitcoin uses a double SHA-256 hash function in bitcoin mining. The SHA-256 hash function has been developed over time building on other hash functions in the SHA family. SHA-256 is a part of the SHA-2 family and is based on SHA-2 but with the capability for larger output strings, up to 256bits. 

Once a transaction is made, the block receives two randomly generated numbers. First, the nonce, a 32-bit whole number, is embedded. This generates a hash, or a 256-bit number, and includes data recorded about the instance: when it occurred (time), where (height), and by whom (relayed by).

These hashes are then organized into a Merkle Tree, or Hash Tree. The merkle root of hashes explains transactions and that is what the Bitcoin blockchain secures – our digital ledger of transactions. The block’s header hash acts as the block’s identifier and stores the previous hash and a random number, nonce. Before the block is added to the chain, miners must correctly produce a Proof-of-Work. This is where the nonce is used – adding to the block header incrementally until miners find a valid hash for the block and move onto mining the next block’s hash.

CrossTower Inc. provides this content for general information purposes, to better inform you on your digital asset investment journey. We do not provide investment recommendations or provide tax advice. Please consult your investment professional or tax advisor if you require assistance in these areas.