What is the hashrate of a cryptocurrency?
The blockchain and cryptocurrencies use hashing. This ensures security, but also ensures that miners can add new blocks to the blockchain.
How difficult it is to add a new block to the blockchain can be expressed through the hashrate. To better understand blockchain technology, you will need to know what the hashrate is and what it says about a cryptocurrency.
What is a hash?
A hash is a series of characters and can be thought of as a kind of secret language. By means of a hash function, a piece of code or text can be converted into a set of characters, making the contents invisible to the bare eye.
In this way, data can thus be protected from outside people, who should not be able to access the content. This can be very useful for passwords for example.
Hash for passwords
Before a password is stored in the database, it is first converted to a hash. Only systems that have the correct key can convert the hash back to its content. Should a hacker gain access to the database, he cannot see the passwords directly. After all, he needs a special key to see the contents.
A hash is not only used for storing passwords. In fact, it can be used for any data stored on a machine. Think for example of documents, images, and applications. It can therefore also be used by blockchains.
How is hashing used for blockchains?
Blockchain technology also uses hash functions. This is because the contents of a block cannot be seen by everyone. This may sound odd, since it is common knowledge that the blockchain is transparent and accessible to everyone. That's true, but it's a bit more nuanced.
Anyone can see what transactions are being made on the blockchain. For example, in a blockchain explorer you can see the address of the sender and receiver, as well as the size of the content. Think, for example, of the number of crypto coins contained in the transaction.
The actual content, however, cannot be seen. This is because it is made invisible by means of a hash function. This means that only the receiver and the sender can access the contents of the transaction.
The hash is also used to develop a chain of blocks. In fact, each block is converted to a hash. This hash is then stored in the next block. This creates a chain of blocks that is immutable, which we call the blockchain.
Miners within the blockchain network are, as you may know, validating new transactions. Only validated transaction can be stored on the blockchain.
The miners are in fact continuously working on finding the right hash. The moment the correct hash of all transactions is found together, they are added to the blockchain. The miner who is first to do so receives a reward. This is also called the block reward.
Mining, and thus validating transactions, requires an enormous amount of computing power (and thus energy). The faster and more often a miner can try to find the right hash in a certain amount of time, the greater the chance that the miner will succeed.
This means that it becomes increasingly difficult to find the right hash when the number of miners increases. This is because there are then many more competitors who are busy finding the right hash. The degree of difficulty thus increases, as a result of which miners must ensure they are even faster. They can do this by using better hardware.
What is the hashrate?
With the hashrate we indicate how much time and effort is needed to find the right hash. A higher hashrate means that it takes miners a lot of time to mine blocks and thus add transactions to the blockchain.
The hashrate is never the same. In the case of Bitcoin, for example, the hashrate keeps getting higher. This is because there is better and better hardware available for miners to use. For network security, it should take about 10 minutes to add a new block.
Because the hardware is getting better and better, miners can add new blocks to the blockchain faster and faster. This causes the security of the network to decrease. That‘s why Bitcoin's hashrate is getting higher over time.
By increasing the hashrate, it will always take about 10 minutes to add a new block to Bitcoin's blockchain.
How can the hashrate be increased?
In the case of Bitcoin, it is already predetermined that the hashrate will be increased every four years. This is called halving: in addition to increasing the hashrate, the reward miners receive is also halved. As a result, fewer and fewer new Bitcoins will come into circulation.
The hashrate can also change due to external influences. This happened in 2021, when China decided to ban Bitcoin mining. A large part of the Bitcoin network consisted of miners in China. As mentioned earlier, the hashrate is partly determined by the number of miners that are active. More active miners mean a higher hashrate.
The moment China decided to ban Bitcoin mining, the network lost a large portion of its miners. As a result, the hashrate became a lot higher. The hashrate was set for a large group of miners. When the group became smaller, this group still had to comply with the same hashrate. The hashrate is then not immediately lowered.
Another benefit this brought was an increase in the number of SegWit transactions. This is because most miners who were not yet using the SegWit update were working in China.
The blockchain, and therefore cryptocurrencies, make use of the hash function. These are used to encrypt transactions, but they also ensure that mining can take place. Miners look for the right hash for all transactions that need to be validated. Once the right hash has been found, a new block can be added to the blockchain.
The hashrate indicates how difficult it is to add new blocks to the blockchain. For example, Bitcoin's hashrate is always around 10 minutes. This is predetermined, and therefore the difficulty will be adjusted after a certain period to meet this 10-minute hashrate.