In all simplicity, an algorithm is a set of instructions to complete a task. In the context of blockchain technology, a cryptocurrency algorithm is a mechanism that allows nodes (computers) to coordinate in a distributed setting.
Understanding of the term
Bitcoin uses the proof-of-work (PoW) algorithm to enable Bitcoin mining. Typically, these algorithms are cryptographic hash functions, which help to adjust the difficulty of mining. PoW is also known as a consensus algorithm, which involves solving complex mathematical puzzles to create new blocks in the network and reach agreement on things like the order of transactions and account balances.
One of the widely used Bitcoin algorithms is SHA-256. Bitcoin and any other existing cryptocurrency utilize this powerful hash function in various ways. SHA-256 helps secure hashing addresses and blockchain data, ensures the identification of blocks, and serves as proof of work in mining.
Popular cryptocurrencies like Cardano, Solana, and Polkadot use proof-of-stake (PoW) algorithms to enable more secure, energy-efficient, and better scaling solutions. PoS achieves consensus by requiring users to stake their tokens to process transactions and validate blocks. Other consensus algorithms include delegated proof-of-stake (DPoS), practical Byzantine fault tolerance (PBFT), and proof of elapsed time, among others.
Blockchain algorithms ensure consensus in decentralized networks. However, different algorithms meet the shared goal of reaching consensus in different ways. In addition to the agreement, the algorithms also ensure the proper functioning of blockchains through mandatory participation of nodes, collaboration, and cooperation.