Behind the scenes, a powerful ally is at work to ensure the safety and integrity of digital assets, cryptography. Is one of the great strengths of this industry. So, if you really want to understand how cryptos work, you need to know about certain cryptographic methods and concepts.
In this article, we will make it simplify some of the most commonly used cryptographic concepts in cryptocurrencies. With real-world examples.
1) Public and Private Keys
Imagine you have a digital wallet, much like a physical wallet, where you store your cryptos. To ensure security, this wallet relies on a pair of cryptographic keys: the public key and the private key.
- Public Key: This is akin to your bank account number; it’s used to receive funds. Anyone can see your public key.
- Private Key: Think of this as your secret PIN or password. You must not share it. You can use your private key to sign transactions and access your funds.
Example: Alice wants to send Bitcoin to Bob. She uses Bob’s public key to create a transaction, which can only be unlocked and validated by Bob’s private key.
Public vs. Private Keys, what's the difference? 🤔
In just 3 minutes, we cover how they work, their roles in #crypto transactions, and tips on how to secure your wallet!
— CoinGecko (@coingecko) September 21, 2022
2) Hash Functions
Hash functions are fundamental to cryptography. They take an input (often any length) and produce a fixed-size string of characters. The key property of a hash function is that it is deterministic, meaning the same input will always produce the same hash value, and it’s practically impossible to reverse engineer the original input from the hash.
Example: SHA-256 (Secure Hash Algorithm 256-bit) is used in Bitcoin. When you input a message or transaction data into SHA-256, it produces a unique 256-bit hash. Even a slight change in the input will result in a vastly different hash.
#Bitcoin SHA-256 hash function runs 340 quintillion times every second to safe-proof the world's first decentralized ledger from harm, unauthorized access, or tampering.
An average system would take 215 million years to perform 340 EH/s worth of hashes.
SHA-256 Explained…🧵 pic.twitter.com/TeTQWa84tP
— F. M. F. (@fmfalconx) April 10, 2023
3) Digital Signatures
Digital signatures are used to verify the authenticity and integrity of messages or transactions. They are created using the private key and can be verified using the corresponding public key.
Example: When Alice sends Bitcoin to Bob, she signs the transaction with her private key. Bob uses Alice’s public key to verify that the transaction was indeed signed by Alice, ensuring it hasn’t been tampered with.
Digital Signatures explained:
A digital signature is an electronic, encrypted, stamp of authentication on digital information such as email messages, macros, or electronic documents, it confirms that the information originated from the signer and has not been altered.#BTC pic.twitter.com/CK9AAThCub
— CryptoCurrency Academy (@Crypto_Academy_) May 16, 2022
Encryption is the process of converting readable data into a scrambled format (ciphertext) that can only be deciphered by someone who possesses the decryption key. This ensures that sensitive information remains confidential.
Example: In cryptocurrency wallets, private keys are often stored in encrypted form. To access the private key and make transactions, the user must provide the decryption key (usually a passphrase or PIN).
— IPMasters (@IPMasters1) February 17, 2019
5) Symmetric vs. Asymmetric Encryption
- Symmetric Encryption: In symmetric encryption, the same key is used for both encryption and decryption. It’s like having a single key that locks and unlocks a door. While it’s efficient, securely sharing the key can be challenging.
- Asymmetric Encryption: Asymmetric encryption uses two different keys – a public key for encryption and a private key for decryption. This is like having a lock that is locked by anyone with the public key. But can only be unlocked by the private key holder.
Example: When you access a secure website (HTTPS), you use asymmetric encryption. Your browser uses the website’s public key to encrypt the data you send, and only the website’s private key can decrypt and read it.
Encryption converts plain text into a coded form that has to be deciphered by a secret key.
So how do the keys work? What techniques do you use in encryption?
— freeCodeCamp.org (@freeCodeCamp) April 5, 2023
6) Blockchain and Consensus Algorithms
Blockchain technology, the foundation of cryptocurrencies like Bitcoin, relies on cryptographic principles to maintain security and trust in a decentralized network. Two crucial cryptographic concepts come into play:
- Hash Chaining: Each block in the blockchain contains a hash of the previous block, creating a chain of blocks. This chaining ensures the integrity of the entire blockchain. If one block’s data is tampered with, it changes the block’s hash, invalidating not just that block but the entire chain after it.
- Proof of Work (PoW): PoW is a consensus algorithm in cryptocurrencies like Bitcoin. Miners must solve complex cryptographic puzzles to add new blocks to the blockchain. This process requires significant computational power and ensures that adding fraudulent transactions is computationally infeasible.
Example: In a blockchain, each block contains a cryptographic hash of the previous block. Changing data in one block would require redoing the PoW for that block and all subsequent blocks, making it extremely challenging to alter past transactions.
Cryptocurrency Explained: Understanding "Double-spend", Block Re-Organization and Bitcoin's Consensus Algorithm.
It's a long video (1hr 24m) but if you want the details and to get a much much better understanding of how Bitcoin works, watch it:
— Andreas (aantonop) (@aantonop) January 21, 2021
7) Merkle Trees
Merkle trees are a way to efficiently verify the contents of a large dataset without needing to examine the entire dataset. They use a tree structure of hash values, with each leaf node representing a piece of data and each non-leaf node representing the hash of its children.
Example: In Bitcoin, people can use the Merkle tree to summarize all transactions in a block. Users can verify that a specific transaction is inside a block by checking its position in the Merkle tree. This is without needing the entire block’s data.
The Bitcoin blockchain is 430 GB big!!
Ever wonder how this huge amount of data is quickly moved & verified around the entire network?
Answer: MERKLE TREES
Explained like you're 5: 🧵
— Shiva (@ShivanshuMadan) August 5, 2022
Finally, cryptography plays a vital role in the security and trustworthiness of cryptocurrencies. It ensures that transactions are secure, private keys remain confidential, and the blockchain remains tamper-proof. Understanding these fundamental cryptographic concepts is crucial for anyone looking to navigate the world of cryptocurrencies safely and confidently.
As cryptocurrencies continue to evolve, so too will the cryptographic techniques that safeguard them, making this an exciting and dynamic field to watch. Here is the second part.
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