Digital currencies do not have any material carrier, they are decentralized and no single institutional body that emits cryptocurrency or is in charge of carrying out cryptocurrency transactions. Blockchain technology is used for these purposes. Blockchain is a connected public chain of blocks that stores information about cryptocurrency transactions. Besides, there is no single body for currency management (like central banks in the traditional financial system). Users manage the system themselves. However, there is a need in transactions confirmation mechanism – automated process of adding information about transactions into cryptocurrency blockchain. This process involves mathematical operations and is basically a certain algorithm.Today The Coin Shark will tell about cryptocurrency algorithms, types of these algorithms, their differences. Besides, you will know what algorithms are used by the leading digital currencies.
- What is a Cryptocurrency Algorithm?
- Proof-of-Work and Proof-of-Stake
- Algorithm sha256 and Scrypt
- Algorithm dagger-hashimoto/Ethash
- Algorithm x11
Cryptocurrency algorithm or hashing algorithm – is a mechanism that encrypts virtual currency. Some algorithms can be used in several digital currencies because the number of cryptocurrencies today exceeds the number of existing algorithms. Miners decrypt this algorithm (seek hash). If the decryption is successful the new block is generated. This block stores information about transactions carried out in the system and the cryptocurrency blockchain expands. As a result miners provide blockchain’s work and get rewards. Algorithm decryption turns body of random data into a necessary succession of data that grants cryptocurrency operation. The result of computing operations that miners carry out is called hash.
If there were no mechanisms for confirming transactions and reaching consensus on the current “valid version” of blockchain, nothing would prevent someone from recording the information about a dozen of Bitcoins or other cryptocurrency, received in their wallet. In Bitcoin, such a confirmation was implemented using the Proof-of-work algorithm (SHA256). PoW, in fact, is how a system checks, if the miner really did all the calculations needed to create a new block. Each block in blockchain contains hash of the previous block so that there is a chain. It is not possible to change blocks. Users can create a new block, that will contain the information about all previous ones. This is rather complex and users do require a lot of computing power to perform all these calculations. This mechanism guarantees that all the information in blockchain is valid and correct. So, PoW provides the right to create new blocks to the most “powerful” miners.
Proof-of-stake is also a mechanism to find consensus. PoS assumes that the probability of forming a block in a blockchain is proportional to the share of cryptocurrency units hold by a miner. This alternative consensus algorithm was first implemented in 2012 in PeerCoin. In a nutshell, it provides priority of confirming blocks to miners who have more coins on their accounts. The complexity of confirmation is reduced if compared to PoW. So, PoS provides the right to create new blocks to the “richest” miners.
Many different combinations of PoS and PoW and other consensus algorithms have been created recently, for example: Proof-of-Activity, Proof-of-Importance, Proof-of-Burn, Proof-of-Capacity, etc.
SHA algorithm was initially developed by the US National Security Agency in 2002. In 2009, Proof-of-Work SHA256 was implemented in Bitcoin, and later in other similar cryptocurrencies. SHA256 algorithm generates a 256-bit hash. The speed and efficiency of decoding depends on the processing power of a miner. The probability of finding hash equals the ratio of miner`s processing power to the power of the entire network. This is why the special mining equipment to improve the power appeared – ASIC-miners. ASIC in fact monopolized Bitcoin mining and made it impossible or at least rather difficult for a wide range of users to mine BTC.
Scrypt is one of the most popular PoW hashing algorithms, along with SHA256. It is currently used in Litecoin, Dogecoin and other virtual currencies. This algorithm is in fact more complex, as it requires a lot of memory, available on the mining equipment. That was a big problem for ASIC-miners. Scrypt aimed to prevent mining monopolization by ASIC, and at first it really worked out. Nevertheless, today ASIC equipment is also used to mine scrypt-algorithm cryptocurrency, which makes the process more centralized and less available.
The algorithm dagger-hashimoto was implemented to mine Ethereum (and later Ethereum Classic). It was similar to scrypt, but required even more available memory. That protected Ethereum mining from ASIC. Then the algorithm was advanced and called Ethash. Users have an opportunity to mine Ethereum using graphic cards. ASIC-miners were not relevant at first, as they did not have enough memory to decipher the algorithm. However, in spring, 2018 ASIC for Ethereum finally appeared. Moreover, Bitmain ASIC-miners for Ethereum cost about $800, which is much cheaper than graphic cards necessary to make a mining farm. Many users consider it as the end of decentralized and available ETH mining and expect Vitalik Buterin to change the algorithm.
The algorithm X11 was developed for Dash cryptocurrency and contains 11 cryptographic hash functions in order to make it difficult to use ASIC-miners. One of the most significant advantages of X11 is energy efficiency – graphic cards for X11 mining consume much less energy and the equipment is rather cooler.
So, the algorithm of a cryptocurrency is its cipher, that has to be decoded by a miner to create a new block and issue new coins. Algorithms are built on the principles of Proof-of-work, Proof-of-stake and their various modifications. Many algorithms have been developed to make it impossible or at least not reasonable to use special powerful mining equipment – ASIC, and thus to keep mining decentralized and available for many users. However, as we can see, ASIC seem to take over so far.