What is ‘Hashing’ in Bitcoin?

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  • ‘Hashing’ is a concept with which many Bitcoin fans are unfamiliar but which is vital to the operation of Bitcoin
  • Without hashing, Bitcoin simply couldn’t function, and yet it can get very complex very quickly
  • Our guide to hashing breaks down the essential purpose and function of hashing in Bitcoin

In Bitcoin, the term ‘hash’ comes up a lot. This is because it’s a very important concept, but one that many don’t understand, and for a good reason: it can get very complex very quickly. We recently covered what the Bitcoin hash rate is and why it’s so important, but let’s dive back one step further and discuss what ‘hashing’ is in the first place.

A Smoothie Way to Think About It

A simple way to think about the importance of hashing is to imagine ingredients going into a smoothie. This is your transaction data. The hashing process blends it all together and leaves you with your smoothie (hash), from which you now cannot get back your original ingredients. Just like how you can’t unmix a smoothie once it’s blended, you can’t turn a hash back into the original message. 

Hashing is a process of taking an input (in this case, data from a Bitcoin transaction) and running it through a mathematical algorithm to produce a fixed-size string of characters, known as a ‘hash’. In Bitcoin, the hashing algorithm used is called SHA-256 (Secure Hash Algorithm 256-bit), and the hash produced is a unique representation of the original data.

This string of numbers and letters is just like a fingerprint which is then added to a block in the blockchain. Once it’s in the blockchain, it’s extremely hard to change because even a small change in the original transaction data will completely alter the hash. This makes Bitcoin transactions safe and tamper-proof.

An Essential Component

When a new transaction occurs, it is combined with other transaction data in a block. The block header, which includes details like the previous block’s hash and a timestamp, is then hashed using SHA-256 to produce a unique hash for that block. This hash is what links each block in the chain to the previous one, forming a continuous chain of blocks…hence, blockchain.

Without hashing, therefore, Bitcoin would lose its core principles of decentralization, security, and trustlessness, rendering it ineffective as a decentralized digital currency. The entire ecosystem would be susceptible to manipulation, fraud, and loss of trust, severely undermining its value and utility.