Updated: Jan 19
...and how does it apply to cryptocurrencies?
The process of conducting secure, anonymous, and confidential transactions of cryptocurrencies between two parties is known as cryptography. Cryptography applies to cryptocurrencies in the form of multiple protocols and algorithms to secure data from acts of counterfeit. Cryptocurrencies are gaining more prominence because of their decentralized nature where no central owner is involved. Cryptography techniques are used to control the mechanisms of creation/duplication of crypto coins, secure transactions, and transfer of cryptocurrency ownership. This article will provide the details about the methods and phenomenon of cryptography as applied to cryptocurrencies.
The Term “Crypto”
You can get an idea about the concept from both of the terms “cryptography” and “cryptocurrency.” The word “crypto” in cryptography stands for secret; whereas the word cryptocurrency is composed of “crypto” and “currency” which clearly depicts the whole connection.
A communication process between two or more parties is made secure using cryptographic strategies where private messages cannot be hacked by third parties to access any confidential data.
Purpose of using Cryptography in Cryptocurrencies
Cryptography permits authenticated, concealed, and unnamed transactions of cryptocurrencies. Bitcoins and other blockchain currencies use cryptography to encode and decode data using pairs of public and private keys. The main purpose of cryptography is to
Prevent double-spending of cryptocurrencies
Ensure a transparent transmission of digital assets
Prevent re-generation of new cryptocurrency units
Secure transactions from third parties
Cover data and transactions for e-commerce, i.e. SSL
Ensure security and viability in communications
Significance of Cryptography
Cryptography plays a major role in injecting portability and transparency in many cryptocurrencies. Public-private key encryption in Bitcoin, Ethereum, and many other currencies, permits secure transactions even with unknown people. It makes cryptocurrency the safest currency worldwide because cryptography techniques eradicate double spend issues. It is practically impossible to counterfeit the blockchain of cryptocurrency created and processed by using cryptographic protocols since one minor change in code will require millions of alterations throughout the blockchain.
Hashing and digital signatures are two useful functions of cryptography used by cryptocurrencies. Hashing is efficiently used to convert large amounts of data into numeric code that is arduous to replicate. Encryption of blockchain account addresses, balance in the account, and transactions between accounts being accomplished by hashing. Whereas digital signatures is an evolved technology of Elliptic Curve cryptography, and is used to provide evidence of ownership. Users sign monetary transactions as proof of agreement towards the ongoing transaction (proof that the account owner is willing to spend the money).
Before learning about cryptographic methods used in cryptocurrencies, you must know the basic meaning of the following terms used in cryptography.
Plaintext is converted into ciphertext using a cryptographic algorithm which is in the form of a mathematical function.
This is a secret password number that is used by an individual to access a cryptocurrency account and spend crypto coins. One must keep their private key to themselves so that no one can maliciously access their account. Bitcoin uses a 256-bit private key with numbers and letters in it such as:
A key is used in the form of a verified address which is used by an individual to receive cryptocurrency. A person will need your public key to send you a crypto. A typical public key looks like this:
9835 0322 00D9 48FA CF7D CB3D CFD6 CD73 98C9 C096 AE79 CF02 35EF C566 DD13 A4BF B6C4 1184 8D76 CB7F AFBA 564F 900B C0B1 2B04 B655 6245 B0CC 8821 37D6 CA4B 3004 A266 B2DC BC04 0130 1000
Some modern applications and exchanges use GUI and backend systems, instead of keys, to verify and secure crypto transactions.
Types of Cryptography applied to Cryptocurrencies
Cryptography mostly relies on strong encryption methods where a message is ciphered to make it unreadable for unintended people and can only be read when decrypted by the receiver. Three major encryption methods that are widely used in cryptography are described below:
Symmetric key encryption uses a similar secret key for encrypting messages at the source, for transmitting that ciphered message to the receiver side, and for its decryption at the receiver end. This process is depicted in the above diagram step by step. It is also known as secret-key cryptography.
Working Mechanism: Alphabets are represented as numbers, i.e. “A=01”, “B=02”, “C=03” and so on. A message like MEET will be denoted in encryption form as “13050520” and this value will be transmitted to the receiver end where it will be decrypted using the same procedure in a reverse manner.
There are two more subtypes of symmetric cryptography called:
Stream Ciphers: Each letter of a secret message is replaced by a pseudorandom string of alphabets using a fixed key. Steam cipher methodology has its implications in securing wireless networks and encryption of web traffic in HTTPS.
Block Ciphers: Type of symmetric cryptography that encrypts a message of fixed length using a key of fixed length.
Symmetric procedure is not scalable and has been hacked many times because a shared key is used for both encryption and decryption processes which compromise the security factor.
Two types of keys, public and private, are used in this type of cryptography. The concept of these keys has already been explained above. These keys are unique pairs generated by using the same algorithm (the public key is achieved mathematically from the private key).
Working Mechanism: A person at the source can encrypt a message through the public key of the receiver, but when the message reaches the destination it can only be decrypted by the receiver's private key(only known to the receiver). To track genuine senders, a public key is used to verify the corresponding paired private key, and the person who owns that paired private key can only decipher the message.
Currencies such as Bitcoins and Ethereum use elliptical curve cryptography, which is a use case of asymmetric cryptography.
A digital signature is a tool of cryptography that is used to present as evidence of ownership. The digital signatures are used at both the sender and receiver ends as shown in the figure below.
These signatures are used to verify the genuine identity of the sender and receiver. However, there are always chances of counterfeit because it is a non-reliable method.
No key is involved in transactions made through a hash technique. It is a one-way encryption process used to determine data integrity. Digital data of any random size is transformed into fixed-length data which is not readable by any third party.
There is no way to reverse the output to acquire the input value in hashing.
Working Mechanism: In this process, random numbers and alphabets are added to a stored value. Stored value is the one that has been converted (encrypted) using a hash algorithm. SHA and MD5 are two popular hash algorithms.
Significance: Hashing maintains the structure of blockchain and data in each block. A minor change in any block will destroy the whole blockchain molding it to an invalid chain.
Zero Knowledge Proofs
This method of cryptography is also widely used in cryptocurrencies. A zero knowledge proof is the kind of evidence which one party presents to another party to prove that a specific statement/transaction is true, without fully disclosing the confidential details about that transaction. The one who gives the proof is the proofer and the one who verifies is named as the verifier.
Tokenization/Transaction ID TDIX
Tokenization is another process on the list. Tokens are lists of numbers or letters that represent real data and all tokens are unique. A public record is kept for transactions performed through tokens, in the form of “The Ledger.” The ledger contains TXID which looks like:
TXID (Hash, unique transaction ID)
From (Hash of public key of sender, Public address of sender)
To (Hash of public key of receiver, Public address of receiver)
Fee 0.00005734 Bitcoin
Cryptography is the backbone of cryptocurrencies and without its implications, it is impossible to maintain secure transactions. So it is fair to say that cryptography is the de-facto necessity to ensure privacy in online transactions. When you go on your way to trade with cryptocurrencies, keep in mind not to share your private key with anyone.
Malicious and expert hackers can invade your cryptocurrency wallet even with a small piece of information about your trades. Also, keep your local devices safe where you have installed your wallets and stored public/private keys. It is expected in coming years that cryptography methods will offer a higher degree of privacy, and will have uses in multiple areas of day-to-day life.
Check more of our insightful articles from the blog menu here.