Algorithm, a term we hear often in the cryptocurrency world, is actually one of the basic concepts of mathematics and computer science. An algorithm is a set of step-by-step operations designed to solve a particular problem or achieve a particular goal. Algorithms can be implemented by both humans and computers.
For example, a cake recipe is an algorithm made up of steps such as mixing ingredients, putting them in the oven, and baking. A human can make the cake by following this algorithm. Similarly, a computer program is an algorithm. A programmer creates an algorithm by writing code that tells the computer what to do.
Algorithms are of great importance in the cryptocurrency world. Cryptocurrencies are built on blockchain technology, which enables decentralized and secure transactions. A blockchain is a data structure made up of interconnected blocks. Each block contains a cryptographically signed hash of the previous block. In this way, any changes or forgery made on the blockchain can be detected.
To transact on the blockchain, transactors (or wallets) must use their private and public keys. The private key is a secret number used to sign the transaction. The public key, on the other hand, is the mathematical derivation of the private key and is used to verify the transaction. The algorithm that provides the relationship between private and public keys is called asymmetric encryption algorithm.
Asymmetric encryption algorithm is an algorithm that can easily calculate the public key from the private key, but it is very difficult to do the reverse. In this way, the private key can be kept secret, while the public key can be made public. Some of the asymmetric encryption algorithms used in cryptocurrencies are RSA, ECC and EdDSA.
Algorithms are also used to create new blocks on the blockchain. These algorithms are designed to ensure the security and consensus of the blockchain. Blockchain consensus means that all participants in the network agree on the state of the blockchain. Blockchain security means blocking malicious people who want to attack or manipulate the blockchain.
The most common algorithms used to create new blocks on the blockchain are Proof of Work (PoW) and Proof of Stake (PoS). The PoW algorithm is an algorithm that requires computing power to create a new block. Thanks to this algorithm, people (or miners) who want to transact on the blockchain need to find the solution to a mathematical problem with a certain degree of difficulty. The problem is to find the value of nonce, which is a random number added to the beginning of the block.
The PoS algorithm, on the other hand, is an algorithm that requires the use of cryptocurrencies rather than computer power to create a new block. Thanks to this algorithm, people (or validators) who want to transact on the blockchain need to lock a certain amount of cryptocurrencies. This lockdown indicates that validators will stick to the blockchain and not act maliciously.
PoW and PoS algorithms have advantages and disadvantages. The PoW algorithm is very effective for securing the blockchain, but it causes a lot of energy consumption and carbon emissions. The PoS algorithm, on the other hand, is beneficial in reducing energy consumption and confirming transactions faster, but can increase centralization and be more vulnerable to some attacks.
Cryptocurrency terms What is the Algorithm? Let's explain with examples, we can answer the question in this way. The algorithm is one of the indispensable elements of the cryptocurrency world and plays an important role in both security and performance.