Cryptocurrencies such as Bitcoin and Ethereum have enjoyed huge popularity amongst crypto users due to their nature that is nearly anonymous, decentralized, and secure. This unique nature supports the peer-to-peer architecture and allows users to transfer funds and other digital assets without the interference of a central authority.
This automated and pseudonymous system of cryptocurrency ensures that all transactions are perfectly processed without any intervention of any kind from central authorities and governments, depending on what forms the backbone of cryptocurrency processing, including several underlying concepts and tools of cryptography.
KEY TAKEAWAYS
• Bitcoin and other cryptocurrencies based on blockchain use different cryptographic methods to maintain their security and fidelity.
• The term “Cryptography” refers to the mathematical and computational practice used to encode and decode data.
• Bitcoin, specifically, depends on three different cryptographic methods including one that is dedicated to creating its public and private keys and another for “mining.” All of these methods are for serving different purposes of Bitcoin.
The “Crypto” in Cryptography
The term “crypto” literally means concealed or secret. However, “Cryptography” means “secret writing” referring to the ability to exchange messages that can only be read by the intended recipient. In the cryptocurrency world, cryptography technology can ensure many functionalities, such as pseudo- or full anonymity, the security of the transactions and the participants, independence of transactions from a central authority, and protection from double-spending.
Besides, Cryptography technology is used to serve different purposes, including securing the transactions taking place on the network, having full control over the generation of new currency units, and verifying the transfer of digital assets and tokens.
For example, Let’s suppose that we are about to make a real-world transaction, like signing a bank check that necessitates our signature. A trustworthy and secure signature can be proven according to the following properties:
1. Your signature should be verified that it is really yours.
2. Providing proof that no one can forge your signature to avoid counterfeit.
3. It should be safe from any possibility of rejection by the signer later. Meaning that you cannot pull out of a commitment as soon as you have signed it.
Similar to the concept of real-world signatures, Cryptocurrencies rely on encryption keys and cryptography techniques that use advanced mathematical codes to store and transmit data values in a secure format to ensure the authenticity of the transaction and participant and that only the intended recipient can read and process the data.
How Does Cryptography Work?
Let’s make things concrete to understand how Cryptography works. Think about radio signals, they are public information and anyone can access a specific signal to listen to their favorite broadcast. However, think about defense-level communications that happen between soldiers on a combat mission. Such type of communication is secure and encrypted and only the intended participants will receive and understand the message rather than being open to the whole world. Cryptocurrency’s cryptography works in a much more similar way.
Put simply, cryptography refers to a technique used to send secure messages between two or more involved individuals, where the sender sends an encrypted message using some sort of a key and algorithm, and the receiver decrypts it to generate the original message.
Encryption keys are the most important element of cryptography. Through their use, unauthorized readers or recipients cannot read a message, transaction, or data, and only the intended recipient can read and process the information. Encryption Keys make the information “crypto” or secret in a more simple term.
A number of cryptocurrencies, like Bitcoin, may not explicitly make use of such secret and encrypted messages since the majority of the information that involves Bitcoin transactions is accessible to the public to some extent. However, some cryptocurrencies that are privacy-oriented, such as ZCash and Monero, can depend on encryption to maintain the anonymity of the value and recipient of a transaction.
Some of the functions that were developed as a part of cryptography have greatly benefited cryptocurrency. They include functions of hashing and digital signatures that make up the main part of Bitcoin processing, although Bitcoin does not directly use hidden messages.
Cryptography Methods Used in Cryptocurrencies
There are several methods of encryption in cryptography.
Starting with the Symmetric Encryption Cryptography. This method uses the same secret encryption key and it involves encrypting the original message at the source, sending the encrypted message to the recipient, and then decrypting the message at the destination. To illustrate that, let’s represent alphabets with numbers, that is, “A” is 01, “B” is 02, and so on. So, a “HELLO” message will become “0805121215,” and the recipient(s) will receive this value later on over the network. As soon as the recipient received the message, they will decrypt it using the same methodology but in reverse, say —”08″ becomes H, “05” becomes E, and so on, to get the value of the original message that is “HELLO.” In this case, even if unauthorized parties got access to the encrypted message “0805121215,” they will not be able to understand it unless they know the encryption methodology.
The previously mentioned example is one of the simplest ones to clarify symmetric encryption, but there are still many complex alterations for advanced security. While this method offers simple implementation advantages with the bare minimum operational overhead, it holds issues related to both the security of shared keys and scalability.
Asymmetrically Encrypted Cryptography is another method that uses both public and private keys to encrypt and decrypt data. While the public key may be revealed to the public, like the address of the recipient of funds, only the owner knows about the private key. With this method, a person can use the recipient’s public key to encrypt a message, but the recipient can decrypt that message using only the recipient’s private key.
This method helps in fulfilling the implementation of both of the two important functions of authentication and encryption for cryptocurrency transactions. While the former is accomplished as the public key makes sure of the paired private key for the true sender of the message, the latter is achieved as only the paired owner of the private key can decrypt the encrypted message.
The method of secp256k1
The asymmetry used for Bitcoin keys is known by the name of elliptical curve cryptography. This specific method is called secp256k1 and probably Satoshi has chosen to use it just for the reason that it was the only available back then. In
addition, Hashing, which is the third common cryptography method, is used to make sure of the security of transactions’ data made on the network. It serves different functions, including maintaining the structure of blockchain data, encoding people’s account addresses, which is an essential part of encrypting transactions process that takes place between different accounts, and making block mining possible. Moreover, digital signatures play a complementary role to these varieties of cryptography processes, by giving the possibility to real participants to prove their identities to the network.
Several variations of these methods with different levels of customization can be used across different cryptocurrency networks.
The Bottom Line
Cryptocurrencies consider anonymity and concealment as key elements for their existence, and several methods were used through cryptographic techniques to ensure that participants and their activities stay hidden on the network.
You need to know that investing your money in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is not as easy as you may think and it is highly risky and speculative, and we don’t recommend investing in cryptocurrencies or any other ICO in this article. Since everyone’s situation is different, and consulting a qualified professional before making any financial decisions is always recommended. We don’t hold representations or warranties on the accuracy or timeliness of the information contained herein.