It is not difficult to understand the growing excitement surrounding cryptocurrencies. But there are still many investors who don’t know what it means. For them, cryptocurrency is an enigma.
To understand cryptocurrency, one must understand the science that goes behind it.
Cryptocurrency uses highly technical, complicated computer language to maintain automated, anonymous transactions that happen. It ensures that each transaction is processed with due diligence and authenticity. The underlying concept of cryptocurrency is cryptography, which makes it a highly sophisticated medium of trade.
What is crypto in cryptocurrency?
The word ‘crypto’ translates to conceal or secret. Cryptography is the process of writing confidential messages intended only for the recipient. Cryptography is widely used in exchanging messages during wars and spycraft. Depending on the method used, cryptography can ensure partial or complete anonymity to the sender. In cryptocurrency, cryptography uses computer technology to conceal the identities of buyers and sellers to ensure absolute security of the transaction, independence from central authority, and protection from double-spending.
Cryptocurrency uses cryptography at every step, from completing each transaction occurring in the network to controlling the introduction of new currencies and verifying the transfer of digital assets and tokens.
How does cryptography work for cryptocurrency?
Cryptography emulates the concept of a real-world signature for cryptocurrencies. Usually, a signature needs to fulfil the following conditions to conduct a transaction successfully.
1. A system should be able to verify that it is your signature
2. It should be counterfeit-proof to make sure that no one else can forge it
3. It should be verifiable and secure to avoid any chance of transaction denial
Cryptography is the same for crypto transactions. It uses cryptography techniques and encryption keys to facilitate secured transactions. With the help of advanced mathematical codes to store and transmit data confidentially from one user to another in a manner that only the recipient can decrypt, read, and process the data.
Cryptography: How the technology works
Cryptography is a complicated technology. But in layman’s terms, it is a method to send messages securely through a network of computers from one user to another that only the recipient can decrypt. Think about messages exchanged between soldiers on a battlefield or among spies when they transfer critical information through secret codes. If you have seen the movie ‘Imitation Game’, you would know that deciphering an encrypted message is arduous.
The sender typically codifies/encrypts the message using different keys and algorithms and sends it to the recipient in cryptography. The receiver uses special decryption tools to read the data. In the whole process, the encryption keys are the most crucial component. Users use encryption keys to prevent unauthorised readers from reading the messages. The encryption keys make the information secret. However, many cryptocurrencies like Bitcoin don’t extensively use cryptography, as most information is publicly available. But cryptos like Zcash and Monero use cryptography to hide information regarding the receiver and value of the transaction. Cryptography tools like hashing and digital signature are widely used in the world of cryptocurrency, including Bitcoins.
Cryptography used in cryptocurrency
Cryptocurrencies use several cryptography methods like Symmetric Encryption Cryptography, Asymmetric Encryption Method, and Hashing.
Symmetric encryption
It uses one set of keys to encrypt and decrypt data. For example, think about using numbers for letters, like 01 for A, 02 for B, etc. The receiver will use similar decryption keys to read the message.
Asymmetric Encryption Method
The asymmetric encryption method uses two separate keys for private and public messages. It is an advanced level encryption technology that using different layers of data encryption. The sender uses public keys for information that is available openly, like the address of the receiver. The receiver possesses both public and private keys to decrypt fully.
The system offers doubled layered security like authentication and encryption for cryptocurrency transactions. The public keys verify that the paired private key is for the genuine sender, and the private keys are used for decrypting the message.
Hashing
The third technique used is Hashing. It maintains the structure of the blockchain data, used for obscuring account details of people. It makes verifying data integrity and makes block mining possible. Using the process of hashing, users can convert data of any size into a fixed-size output.
Hashing is the most critical part of a digital signature system. Digital signatures allow the genuine participants to verify their identity.
Cryptocurrencies use various customisations of these techniques in enforcing cryptography and maintaining anonymity.
Key takeaways
- Cryptocurrency uses cryptography to ensure the anonymity and security of each transaction in the network.
- Bitcoin and other blockchain-based cryptos depend on cryptography methods for data masking, data validation, and authenticity.
- Cryptography is a mathematical practice for encoding and decoding information.
- Bitcoin uses three different cryptography methods – to generate public-private key pairs and a second one for ‘mining.’
Bottom line
Before you invest in cryptocurrency, understand how it works. Bitcoin and other cryptocurrencies extensively use cryptography to ensure anonymity, data security, and mining. This way, all transactions, participants’ details, and activities remain secured and obscured from the public and government institutions. However, investing in cryptocurrencies involves high risk and speculation, so evaluate all aspects of it before investing. Hope this article has helped you understand cryptocurrency better.
Disclaimer: Angel One Limited does not endorse investment and trade in cryptocurrencies. This article is only for education and information purposes. Discuss with your investment advisor before making such risky calls.
