Due to their anonymity, decentralized and secure nature, cryptocurrencies such as Bitcoin and Ethereum are gaining immense popularity. It is possible to transfer funds or other digital assets between two individuals without the need for a central authority.
How can this pseudonymous and automated system of cryptocurrency guarantee that transactions are processed without intervention and with integrity? Enter the underlying concept and tools of cryptography, which form the backbone of cryptocurrency processing.
The “Crypto” in Cryptography
“Cryptography” literally means hidden or secret. Cryptography is the ability to send messages only the intended recipient can see. Cryptography technology can provide anonymity or pseudo-anonymity depending on the configuration. In cryptocurrency, cryptography guarantees the security of the transactions and the participants, independence of operations from a central authority, and protection from double-spending.
Cryptography technology can be used for many purposes: it is used to secure the transactions that occur on the network, control the generation of new currency units and verify the transfer of tokens and digital assets.
Let’s use an example of a real-world transaction, such as signing a check. This transaction requires your signature. These properties are essential for a secure and trustworthy signature:
- It should be verified by others to confirm that it is your signature.
- It should be able to be forged by no other person.
- It must be inviolable from any denial by the signer at any time.
Cryptocurrencies mimic real-world signatures using cryptography techniques. Cryptography uses advanced mathematical codes to secure data and make transactions private. This ensures that only the intended recipient can read and process it. It also ensures the authenticity of the participant and transaction, just like a real-world signature.
How does cryptography work?
Imagine receiving radio signals from your car’s radio, which allows you to listen and record the broadcast. This broadcast is open to all and public knowledge. Think instead of defense-level communication, such as that between soldiers during a combat mission. The communication will be encrypted and secure. The intended recipients will only be able to receive it and know what they have done. It won’t be available to everyone. Cryptocurrency’s cryptography works the same way.
Cryptography, in its simplest form, is a method to send secure messages between two or many participants. The sender encrypts/hides a message using some type of key and algorithm and sends it to the receiver. The receiver then decrypts the message to generate the original message.
The most important aspect of cryptography is encryption keys. They make the message, transaction, or data value inaccessible to unauthorized readers or recipients. It can only be read and processed by the intended recipient. The key makes the information “crypto”, which is secret.
Although many cryptocurrencies like Bitcoin may not use encrypted messages to communicate secret information, most transactions involving Bitcoin transactions are public. There are privacy-oriented cryptocurrencies, such as ZCash or Monero that can use encryption to hide the transaction’s value and recipient.
Many of the tools developed for cryptography are now important in cryptocurrency. They include functions of hashing and digital signatures that form an integral part of Bitcoin processing, even if Bitcoin does not directly use hidden messages.
Use Cryptography Methods in Cryptocurrencies
There are many methods of encryption for cryptography.
The first Cryptography with Symmetric Encryption. It uses the same secret keys to encrypt the message raw at the source, send the encrypted message to the recipient, and then decrypt it at its destination. An example of this is to represent alphabets with numbers. “A” would be 01, “B”, “02”, and so forth. A message such as “HELLO” will become encrypted as “0805121215,” which will be sent over the network to the recipients. Once it is received, the recipient will use the same reverse method–0805121215 is H, 05 is E, etc. to decrypt the message.
This is just one example of symmetric encryption. There are many more for greater security. This method has the advantages of being simple to implement with minimal operational overhead, but it also suffers from security issues and problems of scaling.
The second is Cryptography with Asymmetric Encryption, which uses two keys — public and private — to encrypt and decrypt data. the public key Openly available information, such as the address of the fund receiver.
Private keyThe owner is the only person who can access it. This method allows a person to encrypt a message with the receiver’s public keys, but can only be decrypted by the receiver’s personal key.
This method allows for two key functions: authentication and encryption of cryptocurrency transactions. The public key verifies that the sender is authentic and the private key is paired. However, the private key holder must be able to decrypt encrypted messages.
The third method of cryptography is Hashing. it is used to verify the integrity and validity of all transactions on the network. It is essential to the encryption of transactions between accounts and ensures that the blockchain data structure is maintained. Mining is possible. Digital Signatures are a complement to these cryptography processes and allow genuine participants to prove that they are members of the network.
You can use multiple variations of these methods, with the desired customizations, across different cryptocurrency networks.
The bottom line
Cryptocurrencies are known for their anonymity and concealment. There are many cryptographic methods that can be used to ensure participants and their activities remain secret.