The Hidden Risks Around BTC and Stablecoins: A History of Hash Function Breaks and the Snowden Disclosures

What it means for a hash function to be "broken"

A cryptographic hash function compresses arbitrary data into a fixed-length value, and much of modern cryptography rests on the assumption that finding two different inputs that produce the same hash value (a "collision") is computationally infeasible. When that assumption fails, everything built on top of it -- digital signatures, blockchain integrity -- becomes shaky.

That assumption has, in fact, failed more than once. In 2004, a research team led by Xiaoyun Wang found a practical collision in MD5. In 2005, the same team reported a theoretical weakness in SHA-1, reducing the brute-force cost from 2^80 to roughly 2^69 operations. Then in 2017, a joint team from Google and CWI Amsterdam published SHAttered, a practical collision attack producing two different PDF files with the identical SHA-1 hash. NIST had already begun deprecating SHA-1 for digital signature use starting in 2011, and major browsers phased out support for SHA-1 certificates around 2017.

The key point is that algorithms once considered "safe" have repeatedly been found weak and replaced over the course of decades. Cryptographic security isn't a permanently guaranteed property -- it's provisional, and constantly subject to revision as computing power grows and cryptanalysis research advances.

What cryptography Bitcoin actually uses

One technical point worth getting right: Bitcoin does not use SHA-1. Its proof-of-work mining applies SHA-256 (a newer, separate algorithm from SHA-1, with no practical collision currently known) twice, address generation combines SHA-256 with RIPEMD-160, and transaction signing uses ECDSA (the Elliptic Curve Digital Signature Algorithm) over the curve secp256k1.

So the history of SHA-1 being broken doesn't translate directly into "Bitcoin is unsafe right now." The lesson worth taking away isn't about any one algorithm -- it's the general posture that whatever cryptography is in use today could meet the same fate in the future. Elliptic curve cryptography itself faces a theoretical threat from quantum computing (Shor's algorithm), which we cover in more detail in a separate article.

What the Snowden disclosures left behind for the crypto industry

In 2013, documents disclosed by Edward Snowden included allegations that the NSA had worked to influence cryptographic standards themselves (reported in connection with a program known as BULLRUN). Particular attention fell on Dual_EC_DRBG, a pseudorandom number generator NIST had standardized. As early as 2007, researchers had already pointed out that if certain internal parameters of the generator had a specific relationship, its output could be predicted. After the Snowden reporting, suspicion grew that the NSA may have deliberately engineered that weakness. NIST removed Dual_EC_DRBG from its standards in 2014.

Why this matters for crypto asset holders

Many holders of Bitcoin and other crypto assets place real money behind these systems without understanding the mathematics of hash functions or signature algorithms. That's not entirely a matter of carelessness -- crypto assets have often been marketed on the premise that you don't need to understand the internals to use them. But not understanding a risk doesn't make it disappear. At minimum, the following are concrete risks that fall on the user, separate from the soundness of the underlying cryptography itself:

• Private key custody risk: lose your private key and you lose access to the asset, with no way to recover it in principle.
• Exchange/wallet security risk: even sound cryptography doesn't protect you if the implementation or operations of the service holding your assets is vulnerable.
• Future obsolescence risk: if a currently used algorithm is broken down the line, the practical cost of migrating to a replacement lands on users too.

A risk specific to stablecoins: the transparency of what backs them

Stablecoins carry an additional risk on top of the cryptography: the transparency and reality of the collateral that's supposed to back their value. In May 2022, the algorithmic stablecoin TerraUSD (UST) saw its entire price-stabilization mechanism collapse, and its value -- along with the associated Luna token -- fell to nearly zero. Major asset-backed stablecoins have also faced regulatory scrutiny and settlements over the transparency and auditing of their reserves. In March 2023, even USDC, generally considered well-collateralized, briefly lost its dollar peg after the bank holding part of its reserves failed.

The relationship between crypto assets, stablecoins, and the anonymous crime infrastructure they can enable is covered in more depth in a separate article.

Summary

• MD5 and SHA-1 had theoretical weaknesses reported in 2004 and 2005 respectively, and a practical SHA-1 collision (SHAttered) was published in 2017
• Bitcoin uses SHA-256, RIPEMD-160, and ECDSA (secp256k1) -- not SHA-1 -- so SHA-1's history of being broken isn't a direct risk to it
• The real lesson isn't about any single algorithm, but the general posture that no cryptographic scheme's security is permanent
• The 2013 Snowden disclosures revealed a documented case (Dual_EC_DRBG) of a national agency attempting to influence cryptographic standards -- unrelated to Bitcoin, but a warning against unconditional trust in standardized cryptography
• Practical risks for crypto asset holders break down into three areas: private key custody, exchange/wallet security, and future cryptographic obsolescence
• Stablecoins carry an additional collateral-transparency risk on top of cryptographic risk, illustrated by TerraUSD's collapse and USDC's brief 2023 depeg