what is cryptography in cryptocurrency

Different professions have different “codes” that only members of that profession understand. This could be specific number sequences, phrases, or words, that have a unique meaning and are used to differentiate operations and send different messages. In cryptocurrency, the codes used to convey messages and “other secrets” are known as cryptography.

This article will help you know more about cryptography, cryptography methods used in cryptocurrency, and why cryptography is important.

What is cryptography?

The “crypto” in cryptography means secret, and one can simply describe cryptography as sending secret, encrypted messages only the recipient can interpret. Depending on the kind of encryption, cryptography can either be partly or fully anonymous.

Cryptography makes transactions more secure, aids decentralized operations, and prevents double-spending. They are also relevant in controlling new currency generation and verifying digital assets transfer. They work like face IDs for unlocking phones or like signatures for banks, just that in this case, cryptography makes use of encryption keys and other cryptographic techniques that take the form of mathematical codes. This way, they can store data securely.

Encryption is a security technique that makes data unreadable unless the recipient cracks. An encryption key is a binary sequence created for the sole purpose of locking and unlocking a specific piece of data by using a set of algorithms. These algorithms help to either encode or decode the encryption keys.

Thus, only the sender and recipient can only understand encryption keys, depending on the kind of cryptographic format applied. For instance, just as banks identify your bank signature and approve transactions, so do validators in the blockchain system. 

Cryptocurrencies like Bitcoin may not use overly secret encrypted messages because most transaction information is open to the public. However, other cryptocurrencies that value privacy (e.g., Monero) use encryption to hide valuable data from third parties.

How does public-private key encryption work?

Adam and Bryan are in class, writing secret messages (encryption keys) to each other to make plans about their party. Before now, Bryan had already designed a secret communication code to send/receive concealed messages. To do this, he split it into two— public and private keys.

The public key is accessible to him and his friends mostly (people in his network), while the private key is possessed by him alone. If Adam wants to send a message, he has to send it using the available public key, while Bryan will interpret it using his private key.

This illustration depicts what happens with public-private key encryption. Public-private key encryption, or asymmetric cryptography, can be defined as not having uniformity because the keys are used in different pairs. This cryptographic system functions by having one key— the public key— in one set of encryption keys while the other key— the private key— is in another.

The duty of encrypting and decrypting messages lies in these different pairs, and the public key is commonly used for encryption. In contrast, the private key is used for decryption and is only accessible to its owner to prevent unauthorized access.

Circling back to our example, if Bryan wants to receive a message from Adam, Adam has to use the public key that Bryan has already made to send him a message. When Bryan receives it, he will decrypt the message using his private key. By doing so, anyone who intercepts (or attacks) the message will not be able to understand it, as they do not possess the private key.

To send an encrypted message in a network, the sender has to collect and use the intended receiver’s public key (from a public directory) to encrypt the message before sending it. The message will be decrypted by the recipient when they receive it. Subsequently, if a message is encrypted using the private key, it can only be decrypted using the public key. Note that networks do these processes automatically and do not require users to encrypt and decrypt messages manually.

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Cryptography Methods Used in Cryptocurrencies

Symmetric cryptography is hardly used in blockchain networks, as it is highly frowned upon due to its vulnerability. In its place, most blockchain networks favor other methods like asymmetric cryptography, use of hash functions, and use of digital signatures.

Since we already know how asymmetric cryptography works, we shall briefly explain how hash functions and digital signatures work.

Hash Functions

A hash function is a function that uses mathematical codes to process data with special functions. Many hash functions exist and are used for different purposes, which is why they are very useful in blockchain systems. A hash function output, usually called a hash or digest, is a data set represented as a string of numbers and letters in a hexadecimal form. The length of the output usually depends on the specific hash function.

While the input of a hash function can vary, the output is always no more than a certain length. Also, no matter what the input is, the output will always be the same. However, if the input is tampered with (e.g., data is changed), it will change the output format. This function is most important to the entire usefulness of a hash function, as it makes data validation easier.

It is also important to note that a hash function’s output is a one-way function. This means that you cannot manipulate input to yield your desired output. An output also does not reveal input information, and as such, it can be used to preserve information without revealing the information being preserved. Because hash functions are random, they are most useful in Bitcoin’s Proof-of-Work (PoW) system, which uses the SHA-256 (Secure Hashing Algorithm) for hashing operations.

Hash functions protect and verify data transactions, maintain the data structure, and make mining possible.

Digital Signatures

The concept of a digital signature is similar to that of a physical signature because both are data used to validate identity. A digital signature, however, is more secure as it cannot be copy-pasted and is unique for every piece of data that is being signed.

A digital signature has three parts; the signer’s public key, the signed data, and the signature. The public key is an anonymous identity verifying that the owner has signed the data. The data could be anything like text, images, or other files. The signature is a mathematical code in which the public and private key owner has signed the data.

Note that the private key is only needed to form the signature but not for verification. Validators can use only the public key to verify the signature. Additionally, the signature is generated by hashing the signed data, so validators can be sure the data is uncompromised since it has been signed.

What is the difference between symmetric and asymmetric cryptography?

Symmetric cryptography simply has uniformity in encrypted pairs. This means that the encryption and decryption keys are the same. Though, in the event of an attack, it would be very easy to decrypt the encrypted data as it uses the same encryption keys. This poses a big disadvantage of symmetric cryptographic algorithms, but on the other hand, they are efficient and faster in encrypting bulk data.

On the other hand, asymmetric cryptography means not having uniformity. They use public and private keys, of which the private keys are known to the owner and are in different encryption pairs. The public key is the encryption key used to send messages to the recipient (owner), while the recipient has the private key used for decryption.

Asymmetric cryptography is safer but can also cause network strain due to large data size, heavy CPU usage, and other performance issues.

Why is cryptography important?

Cryptography is very important in every sector, as it protects data from being vulnerable to attackers. In the blockchain sector, blockchain systems rely on different cryptographic methods for data structure and ensure the immutability of stored data.

In cryptocurrency, public-private key pairs are used to store users’ addresses. The public key is the address visible to the general public, while the private key is reserved for validators to authorize transactions and access other data. Validators can also use digital signatures to approve transactions for multi-signature contracts and digital wallets on the blockchain.

Lastly, cryptography is the foundation of blockchain, and if you intend to build a project or career in blockchain, we advise you to dive into cryptography and understand its complexities.

Updated on: October 20, 2022