What algorithms are used with cryptocurrencies

Understanding the algorithms behind cryptocurrencies: from proof-of-work to proof-of-stake

In the world of cryptocurrencies, algorithms are used to verify transactions and ensure the security of the network. These algorithms are also used to mine new coins, which is how new units of a cryptocurrency are created.

One of the most popular algorithms used in cryptocurrencies is called SHA-256. This algorithm was designed by the U.S. National Security Agency and is used by Bitcoin and many other cryptocurrencies.

SH-256 is a cryptographic hash function. That means it's basically a math function that takes input data of any size and produces output data of a fixed size. The output from SH-256 is 256 bits long.

The main reason why SH-256 is so popular in the cryptocurrency world is because it's very secure. Cryptographic hash functions are designed to be one way, meaning it's easy to calculate the hash for some data but extremely difficult to reverse engineer and figure out what the original data was just by looking at the hash value.

This makes SH-256 ideal for use in cryptocurrencies, where security is vital. Every transaction that takes place on the network must be hashed with SH-256 to ensure that it can't be tampered with or changed without being detected.

Another popular algorithm is called Scrypt. This algorithm was originally developed for use in Litecoin, but has since been adopted by many other Altcoins (alternative coins).

In general, Scrypt is faster and more efficient than SHA-256. However, it requires more memory, which can be a problem for some miners. For this reason, some cryptocurrencies (such as Dogecoin) use modified versions of Scrypt that are specifically designed to be ASIC resistant.

ASIC resistant refers to a cryptocurrency that is difficult or impossible to mine using an ASIC miner. Although there are many different types of miners available on the market, ASICs (Application-Specific Integrated Circuits) are specialized devices that are specifically designed for mining cryptocurrencies. Therefore, if a particular cryptocurrency is ASIC resistant, it means that it will be more difficult for those with specialized hardware to mine it.

There are several reasons why someone might want to create an ASIC resistant cryptocurrency. One reason is to level the playing field so that anyone with a computer can participate in mining the currency. This democratization of mining could help increase adoption of the currency by making it more accessible. Another reason for developing an ASIC resistant coin could be security; if a malicious actor were able to develop an ASIC for a particular currency, they could potentially monopolize the network and wreak havoc.

While there are benefits to creating an ASIC resistant system, doing so comes with trade-offs. One downside is that transaction speeds may suffer as a result of increased difficulty in processing transactions quickly enough. Additionally, because regular computers aren’t designed for mining cryptocurrencies, their energy efficiency isn’t great – meaning that any such system would likely consume more electricity than one relying on ASICS chipsets specifically designed with crypto-mining in mind.

Mining Algorithms

There are also a number of different mining algorithms that can be used, such as Proof-of-Work (PoW) or Proof-of-Stake (PoS). These algorithms determine how new units of a cryptocurrency are created and who gets to create them.

Proof of Work  and what it is

In computer science, Proof-of-Work is a system that can be used to deter denial of service attacks and other service abuses such as spam on a network by requiring some work from the service requester, usually in the form of a computation. By making computationally complex solutions difficult or impossible for attackers to generate, Proof-of-Work systems make it more expensive for attackers to carry out these kinds of attacks. In contrast, traditional methods like firewalls and blacklisting are often ineffective against distributed denial-of-service (DDoS) attacks because many attacker nodes may masquerade as legitimate users.

Proof-of-Work schemes have been employed in a number of decentralized digital currencies, most notably Bitcoin where it serves both as an anti DDoS measure as well as part of the mining process which helps secure the network and add new blocks onto the blockchain. Other notable examples include Ethereum's Ghost protocol  and Litecoin's Scrypt algorithm.

Proof of Stake

Proof-of-Stake (PoS) is a type of consensus algorithm by which a cryptocurrency blockchain network aims to achieve distributed consensus. Unlike Proof-of-Work (PoW) based systems, where the algorithm rewards participants who solve complicated mathematical problems with the chance to mine new units of the currency, in PoS-based systems, owners of tokens simply stake their holdings by locking them down in specialized wallets to verify transactions and secure the network. For this they are rewarded with newly minted units of the cryptocurrency.

The key advantage of PoS over PoW is that it is far more energy efficient since there is no need for expensive mining hardware or large amounts of electricity. Another potential advantage is that it should be impossible for any one person or group to control more than 50% of all tokens staked on the network (known as a 51% attack), making such attacks much less profitable and therefore less likely.

There are however some disadvantages associated with Proof-of-Stake systems. One issue is that since block validators are chosen randomly from those holding stakes, if someone owns a large percentage of all tokens then they have a greater chance – although not guaranteed –  of being selected as a block validator. While this does not give them complete control over the network like in a 51% attack scenario, it could lead to centralization if allowed unchecked. Another concern centers around so called “nothing at stake” attacks where by Validators can validate multiple chains simultaneously and potentially earn rewards from each one. Although this again does not enable an attacker to take complete control over any one chain, it could result in confusion and chaos amongst users leading possibly to loss off confidence and value in cryptocurrency networks utilizing Proof-Of-Stake algorithms.