Algorithms explained simply

An algorithm is a sequence of clearly defined instructions used to solve a problem or complete a task. Algorithms are essential in computer science and mathematics, but they also appear in everyday life. Whether it’s a Google search, route planning, or data sorting, algorithms ensure computers perform tasks efficiently and accurately. In this article, you’ll learn everything you need to know about algorithms, including their definition, characteristics, and practical examples. We’ll also explain how an algorithm works, what the term means, and the role algorithms play in the world of cryptocurrency.

An algorithm is a structured sequence of instructions designed to solve a problem or perform a task
Algorithms apply clearly defined processing steps to inputs to produce a specific output
Key features of algorithms include clarity, finiteness, executability, defined inputs and outputs, and determinism
Algorithms are used in many areas, including search engines, cryptography, blockchain technology (e.g., as a consensus mechanism), and healthcare for analysing patient data

Definition: What is an algorithm?

Simply put, an algorithm is a set sequence of instructions designed to solve a problem or perform a task. The term "algorithm" originates from the Persian mathematician Al-Khwarizmi, whose works in the 9th century had a significant impact on mathematics and computer science. The word derives from the Latin "algorismi," which is rooted in Al-Khwarizmi's name. It describes a methodical procedure defined by clear and unambiguous steps. These steps transform an input into a desired output and must be formulated in a way that a computer or a Turing machine (an abstract computational model) can execute.

A simple example of an algorithm is a cooking recipe: you have a list of ingredients (inputs) and a set of steps to follow to prepare the finished dish (output).

How does an algorithm work?

An algorithm applies a series of well-defined processing steps to inputs to produce a specific output. These steps are logically ordered and deterministic, meaning that the same set of inputs will always yield the same result.

Algorithms process data through a structured sequence of steps that are executed systematically. For example, a sorting algorithm takes an unsorted list of numbers as input. Through a series of comparisons and swaps, the list is gradually ordered. Another example is a search algorithm in a search engine, which receives a query and navigates through a database to find relevant information.

Each step in an algorithm must be clearly and unambiguously defined to avoid confusion. This ensures that the algorithm is deterministic and always produces the same output for the same inputs.

Characteristics of an algorithm

An algorithm has several key characteristics:

Clarity: Each step is clearly and unambiguously defined
Finiteness: The algorithm concludes with a result after a finite number of steps
Executability: All instructions can be practically executed
Inputs and outputs: Algorithms have defined inputs and produce specific outputs
Determinism: The same inputs always yield the same output

Examples of algorithms

Algorithms are everywhere in our daily lives, from simple tasks like adding numbers on a calculator to complex queries on Google. They also appear in cooking recipes, instruction manuals, game rules, construction or crafting guides, and even in hash functions within the cryptocurrency world.

Algorithms and machine learning

In machine learning, algorithms are used to identify patterns in large datasets and make predictions. These algorithms learn from data to create models that can predict future events or trends. Machine learning algorithms are the driving force behind technologies like image and speech recognition. A well-known example is the neural network algorithm, which underpins many artificial intelligence applications.

Algorithms and cryptocurrency: Consensus mechanisms

Algorithms also play a crucial role in the world of cryptocurrencies. In blockchain networks like Bitcoin (BTC), consensus mechanisms are specialised algorithms that validate transactions and ensure all nodes in the network have a unified view of the blockchain.

One prominent example is the Proof of Stake (PoS) consensus algorithm, which consumes less energy than the traditional Proof of Work (PoW) mechanism. These algorithms are essential for maintaining the security and integrity of cryptocurrencies.

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The significance of algorithms in handling personal data

Algorithms play a central role in managing personal data and influence many aspects of our daily lives. In the digital era, where vast amounts of data are generated and processed, algorithms enable the efficient analysis and use of this information. They can identify patterns and trends that would be nearly invisible to human analysts.

Significant areas of application include:

AdvertisingAlgorithms analyse users’ online behaviour, such as search engine queries, visited websites, and clicks on adverts. Based on this data, they create profiles and deliver targeted advertisements tailored to individual users’ interests and preferences. This increases the relevance of advertising and can significantly improve the effectiveness of marketing campaigns.
Social mediaIn social media, algorithms determine which content appears in users' feeds based on their interactions and interests. By analysing likes, comments, and shared posts, these algorithms personalise the user experience by prioritising relevant and engaging content.
HealthcareIn healthcare, algorithms help analyse patient data to provide personalised treatment recommendations or identify potential health risks early. By processing large volumes of medical data, they contribute to improving diagnosis and patient care.

However, the use of algorithms in handling personal data also raises challenges and concerns. Privacy and data protection are key issues, as extensive data analysis can expose sensitive information. There is a risk of data being misused or shared without authorisation. For this reason, it is essential that the use of algorithms is transparent and regulated to ensure the protection of individuals' privacy.

Frequently asked questions about algorithms

Here you’ll find answers to the most common questions about algorithms:

What is the difference between an algorithm and a program?

Algorithms are theoretical concepts, while programs are their practical implementation in a specific language.

An algorithm is a step-by-step guide to solving a problem, whereas a program is the implemented version of that algorithm, written in a programming language. A program executes the instructions of an algorithm and delivers a result.

Where are algorithms used?

Algorithms are used in many fields, including:

Search engines like Google, which deliver relevant search results
The financial sector, where they analyse stock prices
Cryptography, where they are essential for encrypting data
Blockchain technology, where they serve as consensus mechanisms or consensus algorithms, enabling secure and efficient transactions

What is the simplest algorithm?

The simplest algorithm is the "Hello World" algorithm, which simply outputs the text "Hello World" and is often used to learn a new programming language. Another simple algorithm is the "Euclidean algorithm," used to find the greatest common divisor of two numbers. These basic algorithms illustrate how simple steps can lead to a defined result.

Further topics about cryptocurrencies

Did you enjoy this article on algorithms and now want to learn more about consensus mechanisms in blockchain technology and the world of cryptocurrencies? Visit our Bitpanda Academy, where you’ll find a range of articles and videos covering various topics in the crypto and finance industries: