What is SHA-256 Algorithm and how Does It Function in the Bitcoin Network?

The world found out about SHA-256 algorithm due to the fact this technology supports the Bitcoin network. This is a cryptographic hash-function that creates an input of an indefinite size and an output of an established size. What makes this algorithm effective is that it works in one way. This means that an output can be produced randomly by any user while the input is generated automatically. There is no way anyone can change or interrupt the existing input. Therefore, this algorithm works perfectly for cryptocurrency and namely – Bitcoin.

Two central processes that take place within the Bitcoin network – mining and creation of addresses – feature SHA-256 algorithm.

How does SHA-256 take part in the mining process?

The process of releasing new coins and introducing them into the current supply is called mining. Mining is performed by powerful computers that solve cryptographic tasks. The fastest and most efficient computer receives a reward for its work – a certain amount of BTC. What is more, mining ensures that the network is secure and no hackers can interrupt the process or falsify payments.

The computers for mining equipped with special hardware and software are called mining nodes. With the help of a node, users can produce blocks which are evaluated by the network and checked if they are valid. Every block includes a header. There are six basic parameters that must be met by a miner:

  • Information about the previous block
  • Version number of the software
  • Timestamp – the time of block creation
  • Merkle root – representation of all operations made in a block
  • Target – PoW algorithm of a block
  • Nonce – PoW variable

Producing the information about the previous block requires its header to pass through the SHA-256 algorithm two times, which is called double-SHA-256. This is how the formula looks like:

Previous Block Hash = SHA-256(SHA-256(Block Header))

The merkle root is also created by SHA-256 and placed into the block header. This element stores the data about all transactions performed in the network.

The next step where SHA-256 also shows itself is coordination with the parameter of the block header called the nonce. This is a variable parameter that changes all the time while SHA-256 functions to evaluate the hash level. If it is lower than the target, than a mining operation is marked as successful.

It means that if the variable is 23154 this data is located in a block header together with other parameters mentioned in the list above. After that the header is getting hashed, but in case the final result exceeds the target, the operation is marked as failed and the mining node starts it all over again. Then miner uses another variable, let’s say 12345 and places it inside the header, leaving the other five parameters unchanged. If the result doesn’t exceed the target this time, then the block is marked as correct and being placed into the general blockchain.

How do Bitcoin addresses are created?

SHA-256 also takes part in the creation of Bitcoin addresses which are known as private keys and required to perform transactions between users. The address is a unique code that consists of random numbers. The created key should go through two algorithms – SHA-256 and RIPEMD160. This is how the formula looks like (K is for the key and B is for the Bitcoin address)

B = RIPEMD160(SHA-256(K))

The main advantage of the use of these two algorithms is an opportunity to create short private keys. While the public key includes 256 bits, the private one is almost two times shorter and includes only 160 bits. This was made for the users and their convenience, since it is much easier to operate with shorter addresses manually.

Popular cryptocurrencies with SHA-256 algorithm

Summing up

SHA-256 is a very important part of Bitcoin network and it ensures both mining process and security of the network. Today, this cryptographic algorithm is one of the most advanced and reliable in the entire cryptocurrency industry.

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