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What Is Cryptography and How Does it Make Cryptocurrency Secure?

What Is Cryptography and How Does it Make Cryptocurrency Secure?

Explainers Essentials

29 Sep 2020

Do you know what the "crypto" in cryptocurrencies stand for? It refers to cryptography.

While the blockchain is responsible for creating decentralized, open, and transparent networks, cryptography is what keeps digital assets – and its users – secure.

But how does cryptography work in terms of digital assets, and is it secure enough to ensure that your coins remain safe?

What Is Cryptography?

Cryptography refers to the practice or technique used to keep sensitive data and communications safe.

The goal here is to share information exclusively with the original recipient, allowing them to understand and process the data while preventing unauthorized access by third parties.

The earliest form of cryptography dates back to Ancient Rome when Julius Caesar used the Caesar cipher to communicate securely with his generals. Cryptography was also used during World War II by Germany to encrypt communications with the infamous Enigma machine.

However, the above forms of cryptography were primitive compared to today's tech.

In modern cryptography, data is encrypted and decrypted with a combination of complex algorithms and their corresponding keys. When you encrypt data as the sender, unless someone acquires the secret key to decipher it or possesses the necessary tools to crack the code, he won't be able to see it. On the other hand, if the recipient has the secret key, he can use it to access the data in its original, non-encrypted form.

Nowadays, cryptography is crucial to keep our communications safe from malicious parties and the public. Therefore, we actively use the tech in our everyday lives.

Today, we use two major forms of cryptography.

The first is symmetric-key or single-key cryptography, where the same secret key is used for both encrypting and decrypting the data. As they share the same key, the sender and the recipient have to trust each other to ensure that third parties are unable to access their communications.

While symmetric encryption usually involves a faster process, it is the least secure option for keeping modern communications safe.

Instead of a single code, asymmetric-key or public-key cryptography uses a pair of keys. While the sender encrypts the message with the public key, the recipient utilizes his private key (also called the secret key) to decrypt it.

Without the private key, even if someone has the corresponding public key, he won't be able to decrypt and read the sender's message.

That's why the private key should be kept in secret, as sharing it with someone else increases the risks of unauthorized access.

How Does Cryptography Work for Digital Assets?

As may already know, cryptocurrencies use public-key cryptography.

Let's say you want to send one BTC to your friend. First, you use your private key (e.g., your password) to log into your wallet. As your friend has already provided his public key (wallet address), you use that to encrypt the data and execute the transaction.

When the transaction is confirmed, your friend uses his private key to access his funds in his wallet.

During the process, both you and the recipient generate a cryptographic hash by signing the transaction. The two hashes will combine into a final signature, providing proof that the transaction was not tampered with.

In blockchain networks, the same process is used for verifying transactions and generating new blocks.

Today, there is no way malicious parties could break the underlying public-key cryptography tech of blockchain networks. It would require them to possess the computational power that is currently unavailable even for the most advanced supercomputers.

However, with recent breakthroughs in quantum computing, a next-generation machine might have the power to break the cryptography most blockchains use in the future. Implementing a quantum-proof algorithm could efficiently protect blockchain networks from such threats.

How to Keep Your Crypto Safe?

As illustrated in the last section, the only way hackers can exploit public-key cryptography is by deceiving users to provide them with their private keys (e.g., through phishing attacks).

Another method attackers have used in the past is to hack crypto service providers that keep their users' private keys in their custody.

However, if you use a secure service and refrain from sharing your secret key with anyone, public-key cryptography will ensure that your digital assets and data remain safe.

You can do so by:

  • No matter what someone says, don't expose your funds' security by sharing your private key. Instead, keep it as a secret in a place where you have exclusive access to.
  • When holding large amounts of funds, consider using a hardware wallet like Ledger or Trezor. These solutions come with a physical device, which you have to use to provide a PIN each time you transfer funds out of your wallet.
  • Use a legit cryptocurrency exchange service for trading digital assets. While it is generally advised to keep funds in self-custody if you're not trading actively, centralized exchanges can be attractive. Many crypto exchanges now offer savings products where users can accrue an interest, or they can put their funds to work in other ways. Crypto exchanges generally keep most of the funds in cold storage. For users who might still feel unsure, exchanges such as AAX will be able to offer insured custodial solutions with regulated entities.

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