Tech
Cryptocurrency in cryptocurrency explained
Cryptocurrencies like Bitcoin AND Ethereal have gained immense popularity due to their decentralized, secure, and nearly anonymous nature. These features support their peer-to-peer architectures and enable the transfer of funds and other digital assets between two different individuals without a central authority.
How does this automated and pseudonymous cryptocurrency system ensure that all transactions are processed with due diligence and authenticity without any intervention? The basic concept and tools of cryptography come into play, which form the backbone of cryptocurrency blockchain.
Key points
- Bitcoin and other blockchain-based cryptocurrencies rely on cryptographic methods to ensure security and fidelity, hence the word “crypto” in the name.
- Cryptography is the mathematical and computational practice of encoding and decoding data.
- Cryptocurrencies generally use two different cryptographic methods: one dedicated to generating public-private key pairs and another for the purpose of validating transactions.
The “Crypto” in cryptography
The word “crypto” literally means hidden or secret. “Cryptography” means “secret writing,” or the ability to exchange messages that can only be read by the intended recipient. Depending on the configuration, cryptographic techniques can provide pseudo-anonymity or complete anonymity. In cryptocurrency, cryptography is used for multiple purposes: protecting the various transactions that occur on the network, controlling the generation of new monetary units, and verifying the transfers of digital assets and tokens.
How does encryption work in cryptocurrencies?
In simpler terms, cryptography is a mathematical technique that hides information. Different techniques are used to convert data from plain text to cipher text.
To encrypt data, an encryption key is required. This is one of the most fundamental aspects of cryptography. This key is usually 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 the case of Bitcoin, 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, the result is always 64 digits.
Some of the most common encryption algorithms are:
- Advanced encryption standards
- Rivest-Shamir-Adelman (RSA)
- Elliptic Curve Cryptography
Bitcoin uses the elliptic curve cryptography method called secp256k1, where the formula y2 = x3 + 7 (over real numbers) generates 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 data stored in blocks. Hashing serves 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 to validate transactions (extraction).
Symmetric vs. Asymmetric Encryption
There are generally two types of cryptographic methods used to generate keys: asymmetric and symmetric.
Asymmetric encryption
Asymmetric Encryption Encryption uses two different keys, public and private, to encrypt and decrypt data. public key can be disclosed openly, such as the address of the recipient of the fund, while the private key is known only to the owner. In this method, a person can encrypt a message using the recipient’s public key, but it can only be decrypted by the recipient’s private key.
This method helps to realize the two important functions of authentication and encryption for cryptocurrency transactions. The former is achieved when the public key verifies the associated private key for the authentic sender of the message, while the latter is achieved when only the holder of the associated private key can successfully decrypt the encrypted message.
Most cryptocurrencies use public and private keys created using asymmetric cryptographic methods.
Symmetric Encryption Encryption
Symmetric Encryption Encryption 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 the representation of alphabets with numbers, for example, “A” is 01, “B” is 02, and so on. A message like “HELLO” would be encrypted as “0805121215” and this value would be transmitted over the network to the recipient(s). Once received, the recipient would decrypt it using the same reverse methodology, “08” is H, “05” is E, and so on, to get the value of the original message “HELLO”. Even if unauthorized parties receive the encrypted message “0805121215”, it will have no value to them unless they know the encryption methodology.
Why is cryptocurrency called that?
The term “crypto” refers to the cryptographic techniques used and the anonymity that cryptocurrencies were once thought to provide.
Where does the word “crypto” in cryptocurrency come from?
“Crypto,” or rather the Latinized form of the Greek word “kryptos,” means hidden, secret, or covered. It has been used for centuries as a combination word to describe things that are secret or hidden. More recently, it has been combined with the word “currency” to refer to the cryptography used in blockchains and their tokens.
What is considered cryptocurrency?
Soon after the introduction of Bitcoin, every blockchain-related token that emerged was considered a cryptocurrency. However, many entities define cryptocurrency differently and there is little consensus on what is and is not 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.