Cryptocurrencies like Bitcoin and Ethereum have gained immense popularitythanks to their decentralized, secure, and nearly anonymous nature. These characteristics support their peer-to-peer architectures and make it possible to transferfunds and other digital assets between two different individuals without a central authority.
How does this automated and pseudonymous system of cryptocurrency ensurethat 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 blockchains.
Key Takeaways
- Bitcoin and other blockchain-based cryptocurrencies rely on cryptographic methods to maintain security and fidelity—putting the "crypto" in the name.
- Cryptography is the mathematical and computational practice of encoding and decoding data.
- Cryptocurrency generally uses two different cryptographic methods—one dedicated to generating its public-private key pairs and another for the purpose of validating transactions.
The "Crypto" in Cryptography
The word “crypto” literally means concealed or secret. "Cryptography" means "secret writing"—the ability to exchange messages that can only be read by the intended recipient. Depending upon the configuration, cryptographic techniques can ensure pseudo or full anonymity. In cryptocurrency, cryptography is used for multiple purposes—to secure the various transactions occurring on the network, control new currency unit generation, and verify digital asset and token transfers.
How Does Cryptography Work in Cryptocurrency?
In the simplest terms, cryptography is a mathematical technique that hides information. Several techniques are used to convert data from plain text to cyphered text.
To encrypt data, an encryption key is required. This is one of the most fundamental aspects of cryptography. This key is generally an algorithm—or formula—that encrypts and decrypts information.
These keys make a message, transaction, or data value unreadable to an unauthorized reader or recipient. Only someone with the correct key can access the data.
In Bitcoin's case, the information from a block is sent through an algorithm, resulting in a 64-digit hexadecimal number. No matter how many characters are in the data, it always results in 64 digits.
Some of the more common encryption algorithms are:
- Advanced Encryption Standard
- Rivest-Shamir-Adelman (RSA)
- Elliptic Curve Cryptography
Bitcoin uses the elliptic curve cryptography method called secp256k1, where the formula y2 = x3 + 7 (over the real numbers) results in an elliptic curve on a graph. This method is used to generate public and private key pairs.
Bitcoin also uses the Secure Hashing Algorithm 256 (SHA256) to encrypt the data stored in blocks. Hashing has multiple functions on blockchains, including efficiently verifying the integrity of transactions on the network and maintaining the structure of the blockchain.
It encodes people’s account addresses, is an integral part of the process of encrypting transactions that occur between accounts, and, on the Bitcoin blockchain, is used for validating transactions (mining).
Symmetric vs. Asymmetric Cryptography
There are generally two types of cryptographic methods used to generate keys, asymmetric and symmetric.
Asymmetric Cryptography
Asymmetric Encryption Cryptography 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 keyis 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 authentication and encryption functions 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.
Most cryptocurrencies use the public and private keys created by asymmetric cryptographic methods.
Symmetric Encryption Cryptography
Symmetric Encryption Cryptography 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" would 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.
Why Is Crypto Called Crypto?
"Crypto" refers to cryptographic techniques used and to the anonymity cryptocurrency was once thought to provide.
Where Does the Word Crypto Come From in Cryptocurrencies?
"Crypto," or rather the Latinized form of the Greek word "kryptos," means hidden, secret, or covered. It has been used for centuries as a combining form word to describe secret or hidden things. Most recently, it has been combined with the word "currency" to refer to the cryptography used in blockchains and their tokens.
What Is Considered Crypto?
Shortly after Bitcoin was introduced, every blockchain-related token that emerged was considered a cryptocurrency. However, many entities define a cryptocurrency differently, and there is little consensus on what is and isn't a cryptocurrency. In general, cryptocurrencies use cryptographic techniques to secure information on a blockchain and issue a token that can be exchanged for money or another token.
The Bottom Line
Anonymity and concealment are key aspects of cryptocurrencies, and various cryptographic techniques ensure that participants and their activities remain hidden to the desired extent on the network.
