Cryptography’s Role In Cryptocurrency

Cryptography is the very backbone of cryptocurrency’s security. It creates and secures the peer-to-peer architecture, which lends cryptocurrency its decentralized, secure, and nearly anonymous nature. We thought it is a good idea to explore the art and science of cryptography in the context of cryptocurrency to deepen your understanding of what makes crypto tick. 

What is Cryptography?

If you and your friends had a secret language where you added letters or syllables after each word to confuse eavesdroppers. You were unintentionally using cryptography. Cryptography is the science of encoding and decoding messages so only the recipient can understand what the sender is saying. It’s found dozens of real-world applications over the course of history, but possibly none more universal than digital security. 

Emails and sms-es, for instance, use cryptography to ensure that even if the message is intercepted, it cannot be read. To do this, it uses a cipher to convert plaintext, which can be easily read and understood, into unreadable ciphertext. It looks like gibberish to anyone except the recipient. This is because only they have a copy of the cipher to decipher or decrypt it.

In the context of cryptocurrency, cryptography ensures that transactions and participants remain secure, double-spending of a coin does not occur and all of this can happen without a central entity (such as a government or bank) overseeing the system.

Cryptographic Methods Used In Cryptocurrencies

Cryptocurrencies use several customized variations of three main cryptographic methods to ensure safety and integrity:

  1. Symmetric Encryption Cryptography

This is simple, relatively easy to crack, and therefore minimally used in core applications. In this, the exact same code has been used to encrypt and decrypt the data, and both parties have copies of the same cipher. It means that any eavesdropper cannot know what the message says. However, if they really wanted to crack the cipher, they’d only have to crack one. To add another layer of complexity, asymmetric encryption is used. 

  1. Asymmetric Encryption Cryptography

This algorithm uses a pair of keys, one to encrypt and another to decrypt. This way, senders and recipients do not need to share the cipher with one another. Instead, an algorithm creates a pair of keys and sends one key each to the sender and recipient. The sender can only encrypt it and the recipient can only decrypt it.

  1. Hashing

Cryptographic hash functions are complex mathematical algorithms that are used to encrypt data in such a way that it cannot be reverse-engineered. This is especially useful to convert private keys into public keys and to verify that public keys and private keys are paired. 

Cryptocurrency transfers rely heavily on public key encryption, which is a form of asymmetric encryption cryptography, and on hashing to ensure the integrity of the keys. 

Public Key Encryption

Here, data is encrypted with a public key, which is available for anyone to use. This encrypted data can only be decrypted with the other key, known as the private key. Similarly, data encrypted with a private key can only be decrypted with a public key. Keys are a large number, or string of numbers and letters that are designed to be impossible to guess. Public keys, as the name implies, can be shared with anyone, but private keys are kept private. 

An Analogy 

I want to send you a gift, but I want to be absolutely sure no one else on the way opens it. So I ask you to send me a click-shut lock that you have the key to. You keep the key and just send me an open lock. That lock is your public key. I put my gift to you into a box and lock it with your lock, ie, your public key. When you get it, you can open it with your key, ie, your private key. This makes the communication secure. But how can you be sure that I’m the one who sent you that gift? 

As it turns out, you’ve sent that lock out to others too, it’s available to anyone who wants to pick one up and send you something. For this, I use a rubber stamp to stamp out my signature onto the box. Only the stamp I own, in this case my private key, can make that mark on the box, i.e. my public key. The design of my mark is freely available to anyone who wants to look at it, so they can verify that it’s my stamp. And the fact that I’ve been able to make that mark means that I have access to my private key, thereby proving that I’m the one who sent you the package. 

That’s a simplified version of what happens with each transaction. 

Anyone who has your public key can send you something that your private key unlocks. Your transaction is signed by the sender’s public key which can only be encoded with their private key. Each transaction, therefore, involves a combination of a public and private key. 

How Does Cryptography Support Cryptocurrency?

Cryptography is an elegant solution to ensure that cryptos remain free and fair. Cryptocurrency largely uses it for 3 actions:

  1. Transaction Security

This includes algorithms that ensure data remains confidential, that its integrity is maintained, that it’s origin and legitimacy can be authenticated, and that all of these actions are performed in such a watertight manner that nobody can doubt the data. 

  1. Generation of new currency units

Hugh powered computers mine new coins by solving complex cryptographic equations. These equations verify virtual currency transactions and then add them on the decentralised blockchain ledger to form a public record of crypto transactions.

  1. Verifying transfers 

Since the identity of the sender and recipient are encoded in their public and private keys, which are generated and verified with cryptography, it’s an important tool to verify the authenticity of each transfer.

Cryptography is the lifeblood of cryptocurrency, lending the latter the qualities that make it the greatest opportunity of our lifetime. As Jacob Appelbaum succinctly put it, “One must acknowledge with cryptography no amount of violence will ever solve a math problem.” By wrapping each of these crucial functions in various cryptographic methods, cryptocurrency ensures that each transaction can be universally verified as legitimate and secure. 

Disclaimer: Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. Each investor must do his/her own research or seek independent advice if necessary before initiating any transactions in crypto products and NFTs. The views, thoughts, and opinions expressed in the article belong solely to the author, and not to ZebPay or the author’s employer or other groups or individuals. ZebPay shall not be held liable for any acts or omissions, or losses incurred by the investors. ZebPay has not received any compensation in cash or kind for the above article and the article is provided “as is”, with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.

ZebPay Weekly

Subscribe for latest crypto news & stay updated!

    Start Trading Now