Basic principles of hashing: how to protect data in the cryptocurrency world

Hashing technology forms the foundation of modern cryptography, blockchain, and digital security. If you’ve ever wondered what secures your financial transactions on cryptocurrency platforms or what guarantees the immutability of a distributed ledger, the answer lies in mathematical hash functions. This material offers a comprehensive breakdown of how hashing works, which algorithms will be used in 2025, and why this technology is critical both for the digital asset industry and for everyday information protection. We will start with basic concepts for beginners, move to technical deepening, and examine specific examples of application in cryptocurrency trading and data confidentiality.

What is Hashing: Basic Concepts

Hashing is a mathematical process that transforms any input data (text, file, transaction, number) into a short fixed-length string, called a hash or hash code. This operation is performed by a special cryptographic algorithm — a hash function. The result looks like a random sequence of characters (for example, 5f4dcc3b5aa765d61d8327deb882cf99), but it is absolutely unique for a specific set of input data.

An analogy with biometrics explains the essence of hashing best: like a fingerprint, which is unique to each individual, a hash represents a unique identifier of data. This identifier allows quick verification of the authenticity of information without revealing its content. For example, when sending a cryptocurrency payment, the system uses hashing to confirm that the operation has not been tampered with.

Key Properties of Hash Functions

Hashing has three critical characteristics that determine its application in security:

Irreversibility. It is impossible to recover the original data from the resulting hash by reverse calculation. This is a one-way operation.

Sensitivity to changes. Even a minimal change in the input (adding one symbol, dot, or space) completely transforms the resulting hash. This feature is critical for integrity control.

Constant output size. Regardless of whether a single word or a multi-gigabyte video file is hashed, the resulting string always has the same length depending on the algorithm. SHA-256, for example, always outputs a 64-character string.

How Hash Functions Work: Step-by-Step Breakdown

A hash function operates as a deterministic algorithm: it takes an input stream (message or data) and produces a fixed output — a hash. This process follows precise mathematical rules.

Fundamental Characteristics of Hash Algorithms

Determinism. The same input data processed by the same algorithm always produces the same result. The word “cryptocurrency,” processed through SHA-256, will give the same hash every time.

Computational speed. Hash functions operate with exceptional speed, processing large volumes of data in fractions of a second.

Collision resistance. The probability that two different inputs generate an identical hash is mathematically close to zero. This property is critical for cryptographic reliability.

Cryptographic robustness. The function must be sensitive to any changes in input data and prevent reverse engineering possibilities.

Practical Example of Data Transformation

Suppose you input the text “start trading cryptocurrency” into the SHA-256 algorithm:

Original text: start trading cryptocurrency

Resulting hash: a7b8c9d0e1f2g3h4i5j6k7l8m9n0o1p2q3r4s5t6

If you change the original phrase (for example, replace it with “start trading cryptocurrency today”):

New hash: x9z8y7w6v5u4t3s2r1q0p9o8n7m6l5k4j3i2h1g

This example clearly demonstrates the critical sensitivity of hash functions: adding just a few characters completely redefines the output string.

Main Hashing Algorithms Today

The cryptographic industry uses various hash algorithms depending on the required security level and application area:

MD5 — the oldest widely used algorithm, generating a 128-bit hash. Although fast, it is now considered cryptographically compromised due to known collision vulnerabilities.

SHA-1 — a predecessor to modern standards, also deemed vulnerable. Its use in critical applications is no longer recommended.

SHA-256 — part of the SHA-2 family, producing a 256-bit hash. It is the main algorithm for Bitcoin and Ethereum blockchain networks, providing a high level of security.

SHA-3 — the newest cryptographic hash standard, selected through an open NIST competition. It offers even greater cryptographic robustness and begins active deployment in 2025.

The Role of Hashing in Blockchain Architecture

Hashing is a structural technology for any blockchain. Without hash functions, it would be impossible to create an unbreakable chain of blocks that forms the essence of a distributed ledger.

Linked Blockchain Structure via Hashing

Each block in the chain contains: data (transactions), timestamp, the current block’s hash, and the previous block’s hash. This structure creates a cryptographic link between blocks.

The mechanism works as follows:

Block formation. All data of the current block (set of transactions, creation time, participant identifiers) are hashed into a single value.

Linking blocks. The hash of the previous block is included in the data of the new block before hashing. This creates an unbreakable cause-and-effect chain.

Protection against manipulation. If an attacker tries to change data in one of the past blocks, its hash will automatically change. This, in turn, will break the consistency in the next block, making falsification obvious.

Example: if Block 1 has hash abc123, and Block 2 contains this hash as part of its data, any change in Block 1 will generate a new hash, say xyz789, which will not match the hash stored in Block 2.

Application in Transaction Networks

When sending a cryptocurrency payment, the system performs the following hashing steps:

All transaction parameters (sender address, recipient address, amount, fee) are combined and hashed. The resulting hash becomes a unique transaction identifier.

The sender signs this hash with their private key, creating a digital signature. This signature can be verified by all network participants using the sender’s public key.

Network nodes verify the cryptographic signature and ensure that no part of the transaction has been forged or altered.

Thus, hashing guarantees the impossibility of falsifying financial operations.

Hashing in Proof-of-Work Mining

Consensus algorithms based on proof-of-work rely entirely on the computational complexity of hash functions. In Bitcoin-like networks, mining works as follows:

Miners take the block data and add a random number called nonce. Then, all this is hashed.

Miners aim to find a nonce value such that the resulting hash starts with a certain number of zeros (for example, 0000abc…). This requires millions of attempts.

This difficulty is automatically adjusted by the network: if miners become faster, the required number of zeros increases.

This computationally expensive process is costly for potential attackers, ensuring the security of the entire network. An attempt to rewrite the transaction history would require more computational power than all other miners combined.

Practical Use of Hashing in Information Security

Hashing extends far beyond the cryptocurrency sector, finding applications in many areas of digital security.

File Integrity Verification

When downloading software, updates, or drivers, users can verify whether the file has been compromised:

The developer publishes the SHA-256 hash of the official file on their website. The user hashes the downloaded file on their computer and compares the result with the published value.

Matching hashes guarantees that the downloaded file is identical to the original and does not contain malicious code or transmission errors.

Password Storage and Verification

When registering on any online service, your password is not stored in plain text. Instead:

The system hashes the entered password and stores only the hash. The password itself is forgotten.

On subsequent logins, the system hashes the entered password and compares the new hash with the stored one. A match confirms the correct password.

Even if the server database is compromised, attackers will only get hashes, from which it is impossible to recover the original passwords thanks to the irreversibility of the function.

Digital Signatures and Authenticity Verification

Hashing is used to create digital signatures that guarantee authorship and immutability of documents:

The document is hashed, and the resulting hash is signed with the author’s private key.

Anyone can verify authenticity using the author’s public key to check the signature.

This mechanism is used in legal documents, corporate contracts, and, of course, in cryptocurrency transactions.

Integration of Hashing in Cryptocurrency Platforms

Major cryptocurrency platforms apply hashing at multiple levels of their architecture.

Security of Financial Operations

Each operation (deposit, withdrawal, internal transfer) is hashed to create an immutable record. If a user later disputes the operation, the hash serves as cryptographic proof that the transaction occurred exactly as recorded.

Proof-of-Reserves Demonstration

Many platforms now publish their reserve data via hash trees (Merkle trees), which can be verified. This allows users to confirm the platform’s solvency without revealing confidential client information.

Encryption and Credential Protection

Personal user data, access keys, and other sensitive information are hashed and encrypted in multiple layers. Even if one security layer is compromised, hashing at other levels prevents full data leakage.

Strengths and Limitations of Hash Functions

Advantages of Hashing

High speed. Hash calculation takes microseconds even for large data volumes.

Cryptographic security. Irreversibility and collision resistance make hash functions a reliable protection tool.

Universal applicability. Hashing works equally effectively in cryptography and in regular databases.

Compactness. Hashes require minimal memory regardless of input size.

Existing Limitations

Theoretical possibility of collisions. According to the pigeonhole principle, with enough data, collisions are inevitable, though the probability is critically low.

Gradual obsolescence of algorithms. Advances in computing and new cryptanalysis methods require periodic updates of standards.

Energy consumption of mining. Proof-of-Work systems require significant computational resources, with environmental impacts.

Vulnerability to quantum computers. Theoretically, quantum computers could accelerate collision searches, necessitating a transition to post-quantum algorithms.

Evolution of Hashing in 2025

The cryptographic industry is currently experiencing active development and adaptation:

Expansion of SHA-3 usage. While SHA-256 remains the main standard, SHA-3 is gaining more application due to its architecture independence from SHA-2.

Preparation for quantum threats. National standardization institutes are actively developing post-quantum hash functions that will be resistant to quantum computer attacks.

Energy optimization. New consensus protocols (such as Proof-of-Stake) minimize dependence on computationally intensive hashing.

Integration into IoT and edge computing. Lightweight versions of hash functions are being developed for the Internet of Things and resource-constrained devices.

Frequently Asked Questions about Hashing

What is a hash in the context of cryptocurrencies?

A hash is a cryptographic identifier created from transaction data. It guarantees record immutability and serves as a unique address for each operation in the distributed ledger.

Is it possible to hack a hash function?

Mathematically, reversing a cryptographically secure hash function is impossible. However, outdated algorithms (MD5, SHA-1) have known vulnerabilities, so their use is no longer recommended.

How often should hash algorithms be updated?

Experts recommend regularly monitoring NIST standards and transitioning to new algorithms as they are standardized and proven reliable.

Does input data size affect hash size?

No. The output size is determined by the algorithm itself. SHA-256 always outputs 256 bits regardless of whether one letter or multi-terabyte file is hashed.

Summary

Hashing is not just a technical mechanism but a fundamental principle of security in the digital world. From guaranteeing blockchain integrity to protecting user credentials, hash functions are an invisible but critically important component of modern cryptography.

Understanding how these functions work allows cryptocurrency platform users to approach security issues more consciously. Hashing will remain a primary tool for information protection for many years, constantly evolving in response to challenges posed by new technologies and computational capabilities.