Definition: Cryptography is the art of writing or solving codes. It’s a secure communication technique that stores and transmits data in a particular form so that only those for whom it is intended can read and process it.
High-level breakdown
Cryptography is the art of writing or solving codes. It’s used as a secure communication technique to send and receive digital data between two parties – with the sender encrypting the pack of data before sending to obscure its content from third parties, and the receiver decrypting it to reveal its content once it’s been received.
Using cryptography and blockchains, crypto transactions allow for transferring of value (secure data) online from one user to another on a peer-to-peer network. Cryptography enables digital currency transactions to be pseudonymous in nature, extremely secure, and “trustless” with no need for a bank, a payment processor, or any other third party in the middle to verify transactions – as they are direct.
Cryptography and blockchain technology isn’t just about digital money; it’s disrupted industries such as digital artwork, supply chain and logistics, web3.0, and much more!
How it’s used in digital currencies?
Bitcoin (BTC), the first-ever cryptocurrency, was launched in 2008 as “an electronic payment system based on cryptographic proof instead of trust” when the pseudonymous Satoshi Nakamoto published the whitepaper
– Bitcoin: A peer-to-peer electronic cash system.
Many attempts have been taken to develop electronic cash, but what makes crypto stand out is its clever use of existing technologies like cryptography and distributed systems (blockchain) to make it highly secure and efficient.
The whitepaper describes that cryptographic proof comes in the form of transactions that are verified and recorded on a blockchain using a consensus mechanism called proof of work.
In 2022, more recent cryptocurrencies like Solana (SOL) and Ethereum (ETH) are starting to use another consensus mechanism called proof of stake which proves to be more efficient and sustainable than proof of work.
You can read about both in this article to learn more.
Why it’s important?
Satoshi Nakamoto solved double-spending with cryptography – without it, there’s nothing to stop someone from making copies of their digital money and spending it multiple times.
The solution is based around public-private key encryption, a commonly used encryption method in data security technology.
Popular cryptocurrencies like Bitcoin, Ethereum, and Solana use this cryptographic encryption method to inherit being trustless and allow secure transactions between any two parties from any region at any given time without the need for a third party.
How does public-private key encryption work?
Cryptocurrencies networks such as Bitcoin and Ethereum issues all it’s users private keys; typically a 12-word phrase that acts as a really strong password.
- This private key is linked to a public key, which is essentially the user’s wallet address for that cryptocurrency; A place within the network that can store cryptocurrency. However, a user’s public key (wallet address) and any funds that reside there can only be accessed using the private key.
- A private key must be kept secret and secure, whereas a public key can be shared freely with others that look to transfer funds there.
- Public keys are generated from a private key using a technique known as “hashing” – which takes a string of data from the blockchain and processes it using an algorithm in creating the link.
- Hashing makes it nearly impossible for anyone or a system to predict a private key by knowing the public key.
- As the two keys are linked, the chosen cryptocurrency network will always recognise the user with the private key as the owner of the corresponding public key
- Anyone can transfer funds directly to a public key, a user’s wallet address, without the need for any intermediary involvement – this also means that transactions are irreversible.
Transactions are recorded in code on a network of peer-to-peer computers, running free open source software, known as a blockchain. It’s a massive decentralised ledger of digital transactions that tracks, records, and constantly verify itself on the cryptocurrency network.
With public-private key encryption which is based on cryptography and the use of blockchain technology, electronic cashless payment systems in the form of cryptocurrencies are created.
