Explaining the Crypto in Cryptocurrency

Cryptocurrencies like Bitcoin and Ethereum have gained immense popularity thanks to their decentralized, secure, and nearly anonymous nature. These characteristics support their peer-to-peer architectures and make it possible to transfer funds and other digital assets between two different individuals without a central authority.

How does this automated and pseudonymous system of cryptocurrency ensure that 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.

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.

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 key is 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.

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.

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.