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Algorithm Meaning

Jun 10, 2023 | Updated Jul 19, 2023
An algorithm is a set of well-defined instructions used to perform calculations, accomplish a task, or solve a problem(s). The instructions must be executed in a specific order to produce the desired outcome.

What is An Algorithm in Crypto?

In the context of crypto, an algorithm is a finite set of commands defining the flow of actions that will solve complex mathematical problems or achieve a certain goal. Cryptocurrencies typically rely on algorithms to secure and validate transactions in a decentralized manner. The encryption algorithms are unique to every cryptocurrency network.

Imagine you and your friends are hosting a geek hackathon. You send out a special invitation letter in the form of a computer game. The invitation letter contains a series of instructions that one must follow to find out the location, time and other details about the hackathon. The invitation letter in this case represents the algorithm and the instructions in it are the steps or operations one must carry out to find out the event details.

In the blockchain context, algorithms, dubbed “consensus algorithms”, are used to verify and validate transactions and add them to the blockchain. For instance, Bitcoin uses a consensus algorithm called proof-of-work (PoW) consensus.  In PoW, network miners/validators compute complex mathematical puzzles to prove their work and earn the right to add new transactions to the blockchain.

Types of Crypto Algorithms

Algorithms in cryptography and data security are used to encrypt and decrypt data. Cryptography refers to the process of keeping communication and information secure from third parties. This makes it useful in securing data in crypto’s ledger systems. The most common types of algorithms in cryptography include hash function, symmetric, and asymmetric algorithms.

Symmetric algorithm

A symmetric algorithm is also known as a secret key or shared key algorithm. This is because it uses the same cryptographic key to encrypt and decrypt data. In most cases, the secret key is only known by the authorized parties.

Asymmetric algorithm

Asymmetric encryption (public-key cryptography) uses two different types of cryptographic keys to encrypt and decrypt data – the public and private keys. While the public key can be shared with anyone, the private key is kept a secret. In essence, the public key allows users to send and receive cryptocurrencies, but only the user with the private key can access funds in the account.

Hash function

Unlike symmetric and asymmetric algorithms, hash functions are keyless. Instead, they generate a hash value, which is a condensed representation of a large dataset. Hash values are nearly impossible to reverse. This makes it useful for key management, authentication, digital signatures, deriving encryption keys, and generating deterministic random numbers.

Consensus Mechanism

Consensus mechanism refers to a self-regulatory stack of protocols, algorithms, incentives, and concepts that help ensure a blockchain’s integrity.

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Total Supply

The total supply of a cryptocurrency measures how many of the currency’s coins/tokens are currently in existence.

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