How Cryptocurrencies use encryption?

If you keep the word cryptocurrency as simple as possible, you will understand that it is just a combination of two words; cryptography and currency. Even after the recent storm of crypto, most of the people still do not fully understand how cryptocurrency and cryptography are related. Let’s explore it.

So, what is Cryptography?

Cryptography refers to the process of creating programs and codes to encrypt data or information so that it can be kept confidential from third parties. The concept dates back to the times of WW2 when military forces used to send encrypted messages to other allied forces. The concept may be old but its application to reform the way we use currencies is phenomenal. The following use cases of encryption in cryptocurrency are really useful.

  • Encryption’s role in securing the various transactions occurring on the network: The technology that guards the buying and selling of cryptocurrency rests on strong encryption. This is kind of similar encryption model that worked ages ago and also being used by different e-commerce players.
  • How it controls the generation of new currency units: Google defines cryptocurrency as “a digital currency in which encryption techniques are used to regulate the generation of units of currency, operating independently of a central bank.” Encryption makes it possible to have a  math-based, decentralized convertible virtual currency that is protected by cryptography
  • For verification of the transfer of digital assets and tokens: Encryption methods are being used to verify the transfer of funds all over the world. In cryptocurrency, Hashing and digital signatures are two main methods through which all the parties can make secure and verifiable encrypted transactions on the system.

Does Encryption Guarantee Security and Privacy for Cryptocurrency?

To start, Encryption allowed cryptocurrency to do what fiat currency couldn’t — eliminate counterfeiting. Does encryption mean a final the answer to all security concerns? No. The encryption in blockchain technology occurs with the public and private key. It is technically and theoretically impossible to deduce the private key of any user because of the encryption that powers the blockchain. Any user can share the public key with someone to transfer funds but private key always remains private. Encryption is a ground-breaking technology and it helps with crypto security but some recent hacks proved otherwise. No technology is perfect and as vulnerabilities happen, crypto organizations cannot only rely on their network just being encrypted.

Wait, there is a possibility…

The argument is, can the entire blockchain itself be decrypted? How about we take a step back and see if that’s possible to nullify the foundation? The experts say it is possible but highly unlikely. A minor group of experts believes that quantum computers pose a risk to the core encryption technology on which blockchain network stands. There is no fixed way or time for quantum computers to go online but whenever they do, they have the power to solve complexed mathematical problems which includes encryption algorithms as well. Quantum computers are faster than any normal computer but we cannot ignore the possibility of this happening because of the fast pace technological era.

Types or Elements of Encryption in Cryptocurrency:

Encryption or cryptography underlines how blockchain network works and it supports it to run well. The main elements of encryption in cryptocurrency is digital signature.

Digital Signatures:

The digital signature is one of the most important cryptographical tools that allows a person to technically “own” the information he has. It evolved from “Elliptic Curve Cryptography”, a technology previously used to create “hidden messages” as part of traditional cryptography.  In Cryptocurrency world, the user signs monetary transactions with these digital signatures to prove that he is the legitimate owner of an account and he authenticates the transaction, which may be to send or spend any sum of money.

The underlying concept of digital signatures works the same as any signatures you do on papers. Just if we think, what should a good signature do?

  • A good signature verifies. Like any signature, a digital signature verifies it is you who actually initiates the transaction.
  • A signature should be non-forgeable. No one else can forge and copy your digital signature, it’s not possible.

All digital signatures are done via the use of “keys”. So, what are keys? And how are the used in the blockchain? We will dig that later.

In modern technology, there are three forms of encryption that are widely used, symmetric cryptography, asymmetric cryptography, and hashing.

Symmetric Cryptography or Encryption:

Symmetric cryptography is the simplest form of encryption that we see in cryptocurrency. It only involves one secret key to cipher and then decipher information. The picture below defines it in its simplest form.

Symmetric encryption is an old and widely accepted technique. It uses a secret key that can be a word, letter, number or a combination of a few letters. All of these elements are blended with the plaintext of a message to change its content in a specific way. How do messages get encrypt or decrypt? The sender and the receiver should know the secret key that is used to encrypt and decrypt the messages.  Blowfish, AES, RC4, DES, RC5, and RC6 are examples of symmetric encryption. The most widely used symmetric algorithm is AES-128, AES-192, and AES-256. The biggest disadvantage of the symmetric key encryption is that all parties involved in the process are supposed to exchange the key used while encrypting the data before they can decrypt it.

Furthermore, there are two types of symmetric cryptography:

  • Stream Ciphers.
  • Block Ciphers.

Stream Ciphers: Stream cipher is the kind of symmetric cryptography which means using a fixed key which replaces the message with a pseudorandom string of characters. The process involves the encryption of each letter one at a time. The most highlighted example of Stream ciphers in real life is its use for encrypting GSM (Global System for Mobile communication) phone data and communication. Edward Snowden revealed in his leaks that NSA keeps breaking GSM for surveillance purpose so it is not a reliable or secured mode of encryption anymore.

Block Ciphers: Block ciphers are another form of symmetric cryptography which uses a key of a fixed length to encrypt a block of fix length. After the input in the form of plain text, it can generate a unique cipher text. Usually, in cryptocurrency or real life, block cipher happens with huge chunks of data. In the graphical representation, the process looks like the picture below.

Asymmetric Encryption or Cryptography

Asymmetric encryption is what we discussed earlier in the form of “keys”. This kind of encryption is also called “Public key cryptography”. The method is relatively new as compared to symmetric encryption and in a graphical representation, it looks like the picture below:

Unlike symmetric, this encryption uses two keys to encrypt a plain text; a public key and a private key to encrypt and decrypt a particular data. The use of one key cancels out the use of the other. The secret keys are usually exchanged over the internet or a large network of users. This process is to ensure that hackers do not take advantage of it and don’t use it for any malicious activity. The two key process is an added layer of security because anyone with a secret key can decrypt the message easily. A public key is always made publically available to anyone who wants to send you funds or message but a private key is for yours to keep. This method of encryption has a far better security layer.

Asymmetric key has far better power in ensuring the security of information transmitted during communication. Some of the popular asymmetric key encryption algorithms include EIGamal, RSA, DSA, Elliptic curve techniques, PKCS.

The Rivest-Shamir-Adleman algorithm aka the RSA: The RSA algorithm is named after three MIT professors who discovered this algorithm, Prof. Rivest, Shamir and Adleman (RSA). The algorithm works by utilizing prime factorization trapdoor and the Diffie-Hellman Key Exchange to achieve asymmetric encryption. Let’s discuss RSA algorithm with these 4 steps:

  1. Key Generation – During this step, a user can employ a random number generator or simply pick 2 very large prime numbers
  2. Key Distribution — During this step, key exchange occurs. The receiver never shares the private key to the sender.
  3. Encryption — During this step, the sender receives the public key and initiate sending funds.
  4. Decryption — At this step, the receiver can acknowledge the transaction or message (m) from the ciphertext (c) by using her private key.

The Elliptical Curve Cryptography: Elliptical curve cryptography is used mainly by Bitcoin’s and ethereum’s protocol for their encryption purposes. Elliptic Curve Digital Signature Algorithm (ECDSA) creates a new set of private key and corresponding public key for the user. The public key of the user is then used with a hash function to create the public address that Bitcoin users use to send and receive funds and to perform any transaction. The private key is always kept secret and is used to sign a digital transaction to make sure the origin of the transaction is authentic.

Conclusion:

Anonymity, trust, and security are the three key aspects of why cryptocurrency came into being. Various methods used in cryptocurrency through cryptographic techniques ensure that all the transactions and exchange of funds and messages remain secure. The examples and use-cases mentioned in this article are just the tip of an iceberg. Encryption in cryptocurrency does a lot than what our minds can calculate. Here’s to the past mathematician who made it possible and here’s to an even better and secure future.

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