Cryptocurrencies like Bitcoin and Ethereum have gained massive market traction due to their decentralised nature. They are used for secure and anonymous peer-to-peer transactions that involve transferring funds and digital assets without involving a central authority. It does not involve any credit card company, bank, government or any other third party in the transactions.
So, how exactly do cryptocurrencies work successfully without the monitoring authority? That is where cryptography comes in.
What is cryptography?
By concept, cryptography is the technique and protocol that allows one to send data that can only be read by the intended recipient. The message can either be pseudo or fully anonymous depending on the user configuration.
In the introduction to cryptography, you realise the technology is ideal for multiple functionalities in cryptocurrency. It can be used to secure transactions and the participants. It also protects from dependence on any controlling authority and avoids double-spending. The technology can also be applied in controlling the generation of new blocks and the verification of transactions.
Through cryptography, cryptocurrency transactions can operate like any other real-world transaction. For example, for a bank check to go through, it must have a legitimate signature. The signature must be verifiable, counterfeit-proof and secure from the possibility of denial in future.
Cryptocurrencies apply the same concept through the use of cryptographic techniques and encryption keys. It involves the use of advanced mathematical codes in storing and transferring data such that only the intended recipient can access and process the data. The concept also requires transaction and participants’ authentication like real-world signatures.
How does cryptography work?
There is a wide range of encryption methods in cryptography. The level of encryption generally depends on the protection the data requires. Some of the common cryptographic algorithms used in cryptocurrencies are;
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Symmetric-key cryptography
In this encryption method, both the sender and the receiver of the data use a single key for encryption and decryption.
Both the parties involved in this type of cryptography must agree beforehand on the key to use. While the data remains protected, there is the challenge of securely transferring the key to the receiver, most so when using secure connections.
This cryptography is also known as secret-key cryptography.
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Asymmetric-key cryptography
This is an encryption method that uses a pair of keys; an encryption key and a decryption key. With every key serving a specific purpose, it instantly adds to the security of the transaction.
The public has encryption information and can be shared with anyone on the network. The private key however has the decryption information that is only available to the rightful owner. Both the keys are generated using an algorithm.
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Hash function
Unlike the other cryptography, this does not use keys. It relies on a cipher to generate data of fixed length and characters to verify transactions. It aligns with the cryptography definition of secure and anonymous transactions.
How does cryptocurrency use cryptography?
Cryptocurrencies rely on two main cryptography; asymmetric-key and hash function cryptography.
The hash function is popular due to the avalanche effects, uniqueness, deterministic and quick nature. It also does not allow reverse engineering. The hash function can also maintain the integrity of blocks when linking them up.
The asymmetric-key algorithms provide for the private and public keys used in tokens and assets transfer. It also supports digital signatures for the integrity of the transactions.
These cryptography applications have worked perfectly so far with the participants in the crypto industry transferring data securely with no third-party invention.