Cryptocurrencies like Bitcoin and ETHereum have gained immense popularity thanks to their decentralized, secure, and nearly anonymous nature, which supports the peer-to-peer architecture and makes it possible to transfer funds and other digital assets between two different individuals without a central authority.
How does this automated and pseudonymous system of cryptocurrency ensure that all transactions are processed with due diligence and authenticity without any intervention? Enter the underlying concept and tools of cryptography, which form the backbone of cryptocurrency processing. Today, we’ll be studying what is cryptography, how does cryptography work, and the types of cryptography.
What Is Cryptography?
In a few words, cryptography is the science of hiding information. More specifically, modern cryptography makes use of mathematical theories and computation to encrypt and decrypt data or to guarantee the integrity and authenticity of the information.
In a basic process of text encryption, a plaintext (data that can be clearly understood) undergoes an encryption process that turns it into ciphertext (which is unreadable). By doing this, one can guarantee that the information sent can only be read by a person in possession of a specific decryption key.
By using specific cryptographic techniques, one is able to send sensitive data even over unsecured networks. The level of encryption will depend on the degree of protection that the data requires. For instance, the type of security used on regular personal files (like contacts) is not the same as the one used on cryptocurrency networks.
Learning how cryptography works is critical to understanding its importance within cryptocurrency systems. Most blockchain systems, such as the one of Bitcoin, make use of a particular set of cryptographic techniques that allow them to function as a decentralized and public ledger, through which digital transactions can take place in a very secure way.
How Does Cryptography Work?
Modern cryptography consists of various areas of study, but some of the most relevant are the ones that deal with symmetric encryption, asymmetric encryption, hash functions, and digital signatures.
The Bitcoin protocol makes use of cryptographic proofs in order to secure the network and to ensure the validity of each transaction. Digital signatures guarantee that each user is only able to spend the funds of his own wallet and that these funds can't be spent more than once. For instance, if Alice sends 2 bitcoins to Bob, she creates a transaction that is, essentially, a message that confirms the addition of 2 bitcoins to Bob’s wallet, while removing the coins from Alice’s wallet. However, she is only able to do so by providing a digital signature.
Another important element of the Bitcoin Protocol is the Hashcash function, which defines the Proof of Work consensus mechanism and the mining process (responsible for securing the network, validating transactions and generating new coins). Hashcash makes use of a cryptographic function called SHA-256.
Types of Cryptography Used in Cryptocurrencies
Multiple mETHods exist for encryption in cryptography:
Symmetric Encryption Cryptography
The first one uses the same secret key to encrypt the raw message at the source, transmit the encrypted message to the recipient, and then decrypt the message at the destination. A simple example is representing alphabets with numbers—say, "A" is 01, "B" is 02, and so on. A message like “HELLO” will be encrypted as “0805121215,” and this value will be transmitted over the network to the recipient(s). Once received, the recipient will decrypt it using the same reverse mETHodology—"08" is H, "05" is E, and so on, to get the original message value “HELLO.” Even if unauthorized parties receive the encrypted message “0805121215,” it will be of no value to them unless they know the encryption methodology.
The above is one of the simplest examples of symmetric encryption, but lots of complex variations exist for enhanced security. This mETHod offers advantages of simple implementation with minimum operational overhead but suffers from issues of security of shared key and problems of scalability.
Asymmetric Encryption Cryptography
This mETHod uses two different keys – public and private – to encrypt and decrypt data. The public key can be disseminated openly, like the address of the fund receiver, while the private key is known only to the owner. In this method, a person can encrypt a message using the receiver’s public key, but it can be decrypted only by the receiver's private key.
This mETHod helps achieve the two important functions of authentication and encryption for cryptocurrency transactions. The former is achieved as the public key verifies the paired private key for the genuine sender of the message, while the latter is accomplished as only the paired private key holder can successfully decrypt the encrypted message.
Hashing
Hashing is used to efficiently verify the integrity of data of transactions on the network. It maintains the structure of blockchain data, encodes people’s account addresses, is an integral part of the process of encrypting transactions that occur between accounts, and makes block mining possible. Additionally, digital signatures complement these various cryptography processes, by allowing genuine participants to prove their identities to the network.
Multiple variations of the above mETHods with desired levels of customization can be implemented across various cryptocurrency networks.
Closing Thoughts
Cryptography is an essential part of blockchain technology and, therefore, is crucial for any cryptocurrency. Cryptographic proofs applied to distributed networks enabled the creation of trustless economic systems, giving birth to Bitcoin and other decentralized digital currencies. Anonymity and concealment are key aspects of cryptocurrencies, and various mETHods used through cryptographic techniques ensure that participants, as well as their activities, remain hidden to the desired extent on the network.
Understanding how does cryptography work and a few of its types will put you at the forefront of this exciting and revolutionary technology for years to come.
