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Updated: Jul 13, 2021


In recent years, many changes have occurred in the global economy, mostly due to the ongoing development and digitization of internet technologies. These changes have led to the emergence of virtual currencies in today’s world. The increasing share of virtual currencies has subsequently caused a growth in the number of transactions conducted through them, significantly impacting the modern economy. With these advancements, security issues keep on popping up; therefore, cryptography encryption techniques have offered an ideal solution in securing information send across any network.

Encryption is critical in securing data and information from unauthorized access and usage hence, maintaining confidentiality. Cryptography is widely used to protect corporate secrets, secure classified information, and personal data to prevent things such as identity theft.

What is cryptography?

Cryptography is the practice of securing information and communications using codes in the presence of third parties (adversaries) so that it can only be read and processed by those whom it’s intended for. This is a technique of sending hidden messages. It's not only used to protect data from alteration and theft, but it's also essentially necessary for user authentication.

The core principles of modern-day cryptography include data integrity, authentication, data confidentiality, and non-repudiation. It’s focused on developing and analyzing protocols that guard against malicious third parties from accessing information being shared between two entities.

Generally, secure communication is when the data and information shared between the two entities can’t be accessed by an adversary, who aims to retrieve the precious information being shared. The three primary types of cryptographic techniques include hash functions, symmetric-key cryptography, and public-key cryptography.

In cryptography, the original human-readable information, which is plain text, is converted into something that looks meaningless to an uninformed observer through an algorithm. The “meaningless form” is what’s known as ciphertext. The ciphertext is then transformed back to plaintext by cryptographic system techniques for the intended recipient to make use of the encrypted information.

Cryptography in Cryptocurrencies

Cryptocurrencies such as Ethereum and Bitcoin usually use decentralized peer-to-peer systems when conducting transactions. Since all the processes are completed online, there are potential risks of hacking and fears that the transactions might be volatile. There are three primary purposes of cryptography in cryptocurrencies: to secure transactions occurring on the network, verify the transfer of assets, and control the creation of additional currency units.

For all of these things to be accomplished, cryptocurrencies rely on ‘public-key cryptography’ or asymmetric encryption cryptography.

Cryptography plays a critical role in the secure process of creation and functioning of cryptocurrencies. It’s very difficult to counterfeit digital currencies because a single code change involves thousands of other changes in the entire blockchain.

The backbone of cryptocurrencies is blockchain technology, which uses cryptography to ensure the security of the data. The use of blockchain technology in the creation and use of cryptocurrencies has an impact based on the fact that it’s impossible to break or decode this technology. This makes cryptocurrency to be the safest type of currency worldwide.

Asymmetric Encryption Cryptography

It is also known as public-key cryptography. In asymmetric cryptography, the users will have private, and public keys that are a random assortment of letters and numbers used to encrypt and decrypt information. They are both encrypted and resemble something like “HUorg4IOiNJ8hjfgOG56sY." A key is usually around 30 numbers or letters.

The primary purpose of the public keys is to give individuals an address to send money to, while the private keys unlock the public key to receive the money that has been sent. So, only the individual who has the private key can unlock the public key.

In the world of cryptocurrencies, anyone can deposit money to the public address or key, but only the person with the private key can access the money. This enables individuals to receive funds and access them without other parties being able to access the funds. For bitcoin keys and Ethereum, the asymmetry used is known as elliptical curve cryptography. This public-key cryptography is a technological marvel that’s rapidly changing the online payment sector.

The Hash Function

The primary cryptographic technique used in cryptocurrencies is the hash function. Hashing involves digital mapping of data of any arbitrary size to data of a particular fixed size. In other words, it's a process of taking some readable information to make something that makes no sense. A good hashing algorithm must have a few requirements, including:

· The output length of the hashing algorithm must be fixed, for instance, 256 bytes.

· Same input to generate the same output

· Every change, however small it is, must produce a significant difference in the output.

· Calculating the hash values should be fast and not compute-intensive.

· There should be no way to reverse the output values to get the input.

The hash function is typically a mathematical function that hides all the data within it and is collision-resistant. For example, when the word “HELLO” is used as the input to the encryption module and the hash function is applied, it will give a specific fixed hash outcome such as “7kdg00we7kdsdh6FS8Lr.” When a change is applied to the input, let’s say the addition of words, the output will be different. So, that's the critical feature that hashing brings.

Hashing efficiently verifies the integrity of transactions’ data on the network. Normally, it’s an integral part of the encryption process of transactions conducted between various accounts, and also makes block mining possible through the structural maintenance of blockchain data and encoding of individuals’ account addresses.

Symmetric Cryptography

Symmetric encryption cryptography uses the same key to encrypt the raw data or message at the source, transmit the encrypted data to the intended recipient, and decrypt it upon arrival. For instance, alphabets can be represented with numbers such as 'B' is '02', 'T' is '03', etc. A simple message like HELLO can be encrypted as 0805121215, which will be transmitted through the network to the intended recipient.

Upon arrival, the recipient will then decrypt the message using the same reverse technique to access the original information or message.

If unauthorized parties receive the encrypted message in numeric form, it will be useless to them unless they understand the encryption methodology. This is one of the most straightforward variants of symmetric encryption, although hundreds of complex variations exist for top security.

Digital Signatures

In today’s world, no matter how intricate the signature, there exist chances of forgery, and it’s impossible to verify signatures with simple visual aids as they are not reliable and very inefficient. Cryptography provides a great solution to this problem - digital signatures, which are usually done via 'keys.'

The concept of digital signatures is also among the essential cryptographical tools used in cryptocurrencies. This method complements the other cryptography processes by enabling genuine users to prove their identity to the network. A digital signature is an essential building block in cryptocurrency, and it’s digitally analogous to the handwritten signatures that we usually make.

What are the properties of digital signatures?

· It's non-forgeable - No other parties should be able to imitate or copy your signature.

· It should verify the user - The signature should prove that it’s you who signed the paper.

· Non-repudiation - After signing something with your signature, you shouldn’t claim that another party did it instead of you.

You can develop your digital signatures, but they can be verified by another individual too. Another feature is that a particular signature is tied to a specific message or document so that it’s not used multiple times for various messages and documents.

A hash function is first applied to the document to be signed to get a digest (hash) of the document, which is fixed in size. It’s then encrypted using the private key to get a digital signature as the outcome. The digital signature is precisely for that particular input. This means that a combination of the original document and the generated hash value for the document with your data appended is a digitally signed document.

Cryptography and the decentralised web

Let’s say you have implemented a peer-to-peer communication, mechanisms for digital entity creation (public and private keys), and mechanisms for the participants to sign documents with their private keys; you're ready to start sending information to other people. Since there are no central authorities to validate the amount of money you have, the system will ask you in strong terms about it, to check if you lied or not. So, the transaction record will have information like: you have 100 coins, you want to send 20 coins to my friend, you will give two coins as transaction fees to the system, and keep the remaining 79 coins. Finally, you only have to sign the transaction record with your private key and transmit it to your peers also in the network. After validation of the transaction, the money will then be sent to your friend.

We have seen how cryptography and cryptocurrencies are widely used digital assets and how cryptographic techniques are used in cryptocurrency. Cryptocurrencies like bitcoin continue to gain popularity due to their secure, decentralized, and anonymous nature, allowing peer-to-peer architecture and enabling two parties to transfer funds and other digital assets without a central authority.

Currently, cryptocurrency cryptography is working exceptionally well. Hence, more people will be comfortable using cryptocurrencies that depend on this technology. However, technologies advance every time, and another system could be invented that is better than public-key cryptography. If it happens, most cryptocurrencies will be updated to absorb the latest developments that will even make them more secure. But only time will tell! The cryptocurrency industry is still exploding with public-key cryptography.

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