How Cryptography Works In Cryptocurrency
Many people have heard of cryptocurrencies, but far fewer people understand how they actually work. A recent study conducted wanted to see how many Americans use cryptocurrency. The study found that 92% of Americans do not own or plan on investing in cryptocurrency largely because of its seeming complexity to use and understand.
Basically, a cryptocurrency is a decentralized digital asset designed to verify and facilitate digital transactions in a distributed ledger (otherwise known as blockchain) through the use of cryptography. In other words, cryptocurrencies allow funds to be transferred between two different people or organizations without a bank or another authority facilitating the transfer.
But how exactly does cryptocurrency allow this transaction to happen without the intervention of a third party?
The answer lies in cryptography. Many people have heard of the word cryptography but also don’t understand how these two things mingle together. The phrase ‘crypto’ that is used in ‘cryptocurrency’ and ‘cryptography’ is synonymous with anonymous, meaning that it allows full anonymity, as well as security, in the transaction (again, there’s no need to go through a bank to complete the transfer).
In this article, I will address some common questions that people have regarding cryptocurrency and provide a detailed explanation for each question to help you understand how this technology works better. To most this technology is still a mystery, and that is not without reason. The subject of cryptocurrency combines the complicated world of monetary systems and combines it with the even more complicated world of cryptography
What Is Cryptography Used For?
At its core, cryptography is simply the creation of codes or encryption to allow secure encryption between individuals in the presence of third parties. It’s most common uses preventing sensitive data from being seen while it is being transmitted over a network or the internet. There is a multitude of ways that cryptography can be applied to a piece of data to obfuscate it. an old-fashioned example would be simply rearranging the letters in a word so that they may not be easily read by the person who does not know the pattern.
With this in mind, cryptography can be used for a wide variety of purposes, including but not limited to:
- To secure a transaction on a network from being seen by outside parties.
- To verify the transfer of digital assets in a transparent manner
- To enable secure network communications that can’t be eavesdropped on
- To ensure email compatibility and security
- To secure transactions/data for online search and e-commerce (SSL is one example)
How Does Cryptography Work With Cryptocurrencies?
Cryptocurrencies use cryptography for a few things like to securing transactions, regulating the creation of additional cryptocurrency and to confirm and maintain a record of asset transfers. Each cryptocurrency user has an address or a payment destination that has a pair of keys associated with it. Think of it like a PayPal address where you can receive money.
The private key associated with a cryptocurrency account is used to authorize transactions. Individuals who have access to your private key can I authorize transactions so hypothetically could the drain your wallet.
To put it more simply, a private key is a secret number that allows a crypto-currency coin to be spent. The private key is basically the password that allows someone to spend cryptocurrency. For this reason, it’s required that you keep your private key… well, private. Here is an example.
The private key may look different depending on the type of cryptocurrency you are using. Bitcoin, for example, uses a 256-bit number & letter combinations. Below is an example of what a private key looks like:
After a transaction has been requested the public key is used to verify the transaction. unlike the private key, your public key can be widely distributed as an “address” to receive cryptocurrencies.
For example, if a friend wanted to send you money they would need your public key. Below is an example of what a public key looks like:
3048 0241 00C9 18FA CF8D EB2D EFD5 FD37 89B9 E069 EA97 FC20 5E35 F577 EE31 C4FB C6E4 4811 7D86 BC8F BAFA 362F 922B F01B 2F40 C744 2654 C0DD 2881 D673 CA2B 4003 C266 E2CD CB02 0301 0001
Avoiding Keys Altogether
As cryptocurrencies become more modern certain crypto exchanges and software applications remove the requirement to handle and deal with public and private keys directly and rather opt for a back-end system or GUI to verify, send, and receive cryptocurrency transactions.
Current Cryptography Methods Used
Said simply, cryptography itself is just a method to send secure messages between two different people, with that message being encrypted or hidden via a mathematical algorithm. Then, the recipient will need to decrypt the message in order to read it. This is accomplished by using both a private and a public key to decrypt the information.
This is why encryption is so important when it comes to cryptocurrencies. Without the use of encryption, the whole point of cryptocurrency is rendered useless, because then the transaction or the data would be readable by unauthorized people.
Using cryptocurrency technology to send and receive digital funds stands in stark contrast to completing the transfer through a bank.
With a bank, you obviously have to sign a check that should be verifiable by others, to prove that no one else is making the transaction and also to ensure that you commit to the transaction.
In contrast to this, cryptography uses mathematical codes and encryption keys to take the place of the signature on a check. It also does so in a secure way to ensure that only those who are intended to receive the transaction actually receive it. You can think of this like a digital signature.
While it might seem complicated, encryption is actually a fairly simple process of encoding information from one source to another. This also means that the system is decentralized requiring no third-party for verification of the transaction.
Now granted, many cryptographic methods are not used for sending secure encrypted messages that are only readable between the sender and the recipient. In fact, many of the transactions made with the cryptocurrency Bitcoin are kept available to the public. That being said, many other cryptocurrencies such as Monero are designed explicitly for private transactions and are 100% anonymous.
Just based on the sheer math involved with the lock and key principle used in the cryptography of cryptocurrencies, saying that this system is secure would be a huge understatement. Because in all practicality it is virtually impossible to fake a digital signature. This allows very secure transactions without a third party.
Another important cryptographic method used with cryptocurrency is called zero-knowledge proofs. In cryptography, a zero-knowledge proof is a method which one party can prove to another party that a given statement or transaction is true without revealing intimate details of the transaction itself. the people doing the proving in the verifying or often referred to as the proofer and the verifier respectively. You can see this represented and the blockchain or public ledger used by some mainstream cryptocurrencies. Zero knowledge proofs were originally inspired by how SSL/TLS negotiations work.
What Are Some Different Methods Used In Cryptocurrency?
There are several different methods that are used with cryptography when it comes to cryptocurrency.
One method is called hashing, which is designed to encode the account addresses of users in order to encrypt transactions between accounts. Digital signatures then allow the participants to prove that they are who they say they are.
The hashing method adds random letters and numbers to the stored-value so it cannot be interpreted plainly. The stored value is called the ‘hash value’, ‘message digest’, ‘digital fingerprint’, ‘digest’ or ‘checksum’ at the point after it’s been converted & stored. There are various standards for using hashing, the most common is MD5 or SHA-1.
Another process that will happen when using cryptocurrency is referred to as tokenization. In cryptography and cryptocurrency, the term token is generally used to refer to a string of numbers and letters that aren’t in themselves real data but rather a representation of real data somewhere. some people may refer to this as tokenize data.
Because of this, the word token is a synonym for cryptocurrency. And the fact that each token is unique plays into cryptocurrency in what’s known as the Public Ledger. By using tokenization there can be a public record of transactions using The Ledger while still maintaining anonymity privacy and security for the user. Since cryptocurrency identifies token as a transaction the public Ledger will show what’s call TXIDs.
TXID (hash of the transaction; a unique transaction ID number): 947153d332beaf39dec6ebae8883bfb84eda47abccccbc2d61436d8d1e81584d <—- this is what tokens look like
FROM (a hash of the sender’s public key; their public address): 1JMk91gy6MUBuySoxoArB6MtyeNhhSa7dr- 0.0000596 BTC
FROM (a hash of the sender’s public key; their public address): 17JvnxVuxmxYfrtJvdedhxjL8XrSF8tYqV – 0.02451455 BTC
TO (a hash of the recipient’s public key; their public address): 39fiTiMqHKToAfC4tZK2jhTzxenE7VhQMi – 0.02451681 BTC
FEE: 0.00005734 BTC
Another common cryptography method is called Symmetric Encryption Cryptography, which basically uses a single key to encrypt a message, transmit it to a recipient, and then decrypt it once it has been received. This is easily one of the simplest encryption methods there is. Also implementing symmetric cryptography can be highly effective and largely non-noticeable in terms of speed. When using symmetric key technology the keys being used can either be identical or different between two or more parties at the same time.
One more cryptography method used as well is called Asymmetric Encryption Cryptography. Unlike Symmetric Encryption Cryptography, which uses one key, Asymmetric Encryption uses two. One key is public, and the other is private.
The idea is that the public key can be used to encrypt a message, but the private key has to be used to decrypt it. This helps to authenticate and encrypt cryptocurrency transactions, with authentication being achieved when the public key verifies the private key that has been shared with it, and the private key is then used to decrypt the message or transaction.
A possible downfall to public key cryptography is people losing or revealing their key. If a person Miss places their private key and have no way of recovering it any funds associated with his or her cryptocurrency wallet will be lost. Similarly, if a person accidentally reveals their key to someone else, that other person could hypothetically drain their cryptocurrency account.
Without cryptography, cryptocurrencies, as we know them, would simply not be possible. With it, you can ensure that your transactions remain hidden to the extent that you desire. From a business standpoint, cryptography is a de-facto requirement. Most consumers now expect a reasonable degree of privacy in their online interactions and transactions.
A good first rule for everyone using cryptocurrency should be to not share your private key with anyone other than trusted individuals. A common way people get their key stolen is by posting images on social media that reveal information that would lead malicious actors to find a way into their cryptocurrency wallet. Another important thing to remember is to keep your local devices secure as well. Since some cryptocurrency wallets store your public and private key locally on whatever device you may be using there is a chance that if your device is hacked that your cryptocurrency account could be compromised.
Currently, there is much to say about the role cryptography plays in cryptocurrencies. A well-known computer scientist Emin Gun Sirer of Cornell University was quoted as saying “cryptography in cryptocurrencies is “basic and simple” and just plays “an ancillary role.” The biggest innovation, he added, is the use of blockchains (publicly viewable ledgers that record every transaction since its beginning) as “consensus protocols” and “distributed systems.”
The concept of cryptography is been around for thousands of years. Despite this fact, public key cryptography is still in its infancy. In fact Bitcoin, the world’s first cryptocurrency is only been around for about a decade. as we see more and more people transitioning to cryptocurrency we can expect to see cryptography play a bigger and bigger role in the day-to-day lives of the average citizen. Hopefully, we will see a proportional increase in the amount of security these various cryptographic methods provide.