The new buzzword, cryptocurrencies are now firmly at the forefront of financial and technological innovation, and are quickly gaining widespread acceptance. This is understandable: cryptocurrencies offer participants the ability to move digital assets without interference or oversight on the part of a central authority. In that respect, cryptocurrencies have a liberating effect on the financial world. Add to that the fact that cryptocurrencies are secure, and the popularity of cryptocurrencies becomes clear.
For many, however, cryptocurrencies remain a highly arcane concept, since not everyone understands how cryptocurrencies actually work. Cryptocurrencies are based on something known as cryptography, which serves as the foundation of cryptocurrencies. The aim of this article is to explain what cryptography is; this in turn will make cryptocurrencies a lot less mysterious to the reader.
Cryptography is the process of rendering information (typically, written information) secret by using a secret code (“crypto” denotes something hidden or secret in ancient Greek). With cryptocurrencies, cryptography allows users to stay anonymous and conduct their operations securely. The purpose of cryptography is manifold: perform verification, ensure that everything is secure, and assure that there is control over generating new currency units. Cryptography employs sophisticated codes in order to ensure that data transmitted between a number of users is only visible and legible to those users, thereby safeguarding the anonymity of the participants and upholding the confidentiality that they require, all the while protecting all parties against fraudulent intent. Essentially, cryptography aims to ensure that information relating to cryptocurrency transactions is not revealed to anyone who is not associated with these transactions.
To attain this objective, cryptography utilizes encryption to keep information hidden from unauthorized viewing. When a message is exchanged between parties, the sender encrypts the message by using an encryption key; the party on the receiving end then decrypts the message to make its contents legible. No one else will be able to make any sense of the message.
While not all cryptocurrencies make use of encryption with messages (bitcoin is one such example – bitcoin transactions are fairly transparent), a number of currencies employ various methods of encryption to ensure that all transactions involving these currencies remain anonymous (Monero and Zcash are good examples of such cryptocurrencies).
There are a number of methods used with cryptography. One such method is the symmetric-key algorithm method. In simple terms, this method uses the same cryptographic key to encrypt a message on the sender’s end, transmit it over to the sender, and decrypt it on the receiver’s end. Should the message be intercepted or viewed by a third party during transmission, that party will not be able to decipher the contents of the message – the message will be illegible. The level of complexity varies considerably with the symmetric-key algorithm method.
Another method used with cryptography is the asymmetric cryptography method (also known as the public-key cryptography method). This entails the use of two different keys: one is a public key, and the other a private one. The public key is disclosed; the private key is not and is only known by its owner. With this method, an individual seeking to send a message can encrypt it using the receiver’s public key; the message can then only be decrypted by the owner’s private key, known only to the owner. The use of a pair of keys provides an added level of protection for cryptocurrency transactions.
A third method is hashing. Hashing involves inputting various data that will then be rendered into data of a fixed length for output. In other words, regardless of the size of the data inputted, its output will be of the same size. This is used for data integrity verification. Hashing is also buttressed by the use of digital signatures, which ensures proper authentication and helps make the process more secure.
The outlined methods also lend themselves to customization.
While the above has been simplified for the reader’s benefit, by this point the reader should have a better idea of what cryptography is in the context of cryptocurrencies, and how it makes the technology behind cryptocurrencies more secure and efficient.
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