itcoin, Ethereum, and just cryptocurrencies, in general, have been gaining a lot of popularity recently. This is all thanks to the fact that they have features that make them stand out from fiat currencies, like being decentralised, encrypted and highly secure, and it also has the ability to let the user retain their anonymity. Cryptocurrencies also have an architecture that supports peer-to-peer transactions, allowing the transfer of funds and other digital assets between two users that does not require a central authority.
But how exactly does this automated network of cryptocurrencies make sure that all of the transactions are processed accordingly without being interrupted or tampered with? This is where the concept and tools behind cryptography come into play.
What Does the “Crypto” in Cryptocurrencies Mean?
Cryptography got part of its name from the word “cryptography”. The ‘crypto’ in cryptography means ‘secret’, which is very fitting since cryptography is the process in which data is concealed in a way that only the intended recipient is able to gain access to it. Depending on how a piece of data is encrypted, your identity can be given the basic amount of protection, all the way to full anonymity. Cryptography is also the one responsible for making sure that transactions on the network are secure, which in turn makes central authorities unnecessary.
There are far more uses for cryptography within a cryptocurrency’s network, such as securing the transactions on the network, being responsible for the generation of new currency units, and for verifying transfers of digital assets and tokens.
It works in a very similar process to the real-world act of signing a bank check. First, a signature should be verifiable by others. A signature should also be unique and hard to counterfeit to ensure that only you can sign your signature. And lastly, your signature must have no possibility of denial by the person who signed.
Cryptocurrencies are similar because they emulate the concept of signatures by implementing the use of cryptography and encryption keys. Cryptography involves using complicated mathematical codes to convert data into a format that can be stored and transmitted in a way where it is ensured that only the intended recipient is able to receive, access, and modify the data. This ensures that a transaction is valid and authentic and that the participant is genuine.
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How Cryptography Works
Another way of thinking about cryptography is by comparing it to radios. For example, using a car’s radio enables you to tune in to public broadcasts. This would pose no problem since public broadcasts are meant to be accessible to everyone. Military radios used in defence-level communication, on the other hand, should guarantee that communication only happens between soldiers of the same troop. Because of this, communications that happen between military radios are secure and encrypted. Only the people who are intended to receive the message will be able to receive the message instead of broadcasting it to the whole world. The cryptography techniques present in cryptocurrencies work in the same way.
To put it simply, cryptography is a way to ensure that any messages sent between two or more participants are secured. Encryption keys are vital and are the most important aspect of cryptography. They are responsible for hiding data values and making them unreadable and inaccessible by anyone who isn’t authorised to do so.
There are three main purposes for cryptography within cryptocurrencies. The first one is that it ensures the security of all the transactions in the network. Second, it serves as a way to control the addition of new cryptocurrency units. And lastly, it is there to verify any kind of transfer of assets. In order to be able to do all of its intended purposes, it makes use of something called “public key cryptography”. This refers to the cryptography method wherein users are required to keep both a public and a private key in order to conduct transactions. The public key is there in order to provide a virtual address where people can send or transfer money to. Meanwhile, the private key exists as a way to unlock the public key and be able to access the funds that have been transferred.
Because of this system, anyone is able to deposit money to an address made by the public key, but the only one who can access it is the one who holds the corresponding private key. This system is very secure and ensures that other people or any kind of outside party will not be able to access someone’s crypto holdings without one private key. The only possible drawback to this system is that there is a possibility that a person can lose access to their holdings if they lose their private key. There is also the possibility of theft if a person accidentally reveals their private key to interested parties.
Cryptocurrencies may or may not explicitly use these kinds of encrypted messages and encryption methods since some of the larger cryptocurrencies such as Bitcoin conduct public transactions to an extent. However, for those cryptocurrencies that emphasise their focus on security, they can use encryption to conceal the details of a transaction, such as an amount and the recipient.
Some of the tools that can be found within cryptography have found a lot of valuable uses within cryptocurrencies. Examples of such functions are digital signatures and hashing methods, which are coincidentally a vital part of how Bitcoin processes transactions, even if hidden messages are not a regular part of its transactions.
Cryptocurrencies can make a nice addition to your investment portfolio, especially if you’re looking for a long-term investment.