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Cryptography can mean either the analysis or the deciphering of codes, ciphers and cryptograms.
Cryptography is a method of keeping information and communications private using codes so that only specific people can access them. It’s a cornerstone of security and fidelity that has drawn many investors to Bitcoin and other blockchain currencies.
Bitcoin uses three different methods to protect the information of investors, including one process for public–private key pairs and another for mining. Cryptography uses a mathematical code to guarantee the security of transactions and protection from double-spending (the risk of people using cryptocurrency more than once).
Why is cryptography important?
One of the simplest uses of cryptography is data encryption, which scrambles ordinary text from the sender of an email or text message and rearranges it to its proper format when the recipient receives it. Because the message is encrypted, if a third party intercepts it, they won’t be able to read it. However, if the recipient has a key to decode the message, they can access its contents.
There are three main reasons to use cryptography in cryptocurrency:
- To secure transactions
- To control the creation of additional units
- To verify the transfer of assets
Bitcoin and other common types of cryptocurrencies use a technology known as public–private key encryption that allows a secure transaction to occur directly between the parties involved without the need for a third-party intermediary, such as a bank or PayPal. Cryptography enhances these transactions by making the details available only to the parties involved in the transaction. The parties have the peace of mind that the information they sent can’t be altered during storage or transit and that the other party can’t say they didn't mean to transmit the information. Additionally, cryptography allows both parties to confirm the identity and location of the other party involved in the transaction.
Developers use several cryptography techniques to keep transactions between two parties private, including the following:
Public key cryptography
This type of cryptography involves a user having a public key and a private key, each encrypted with a random assortment of letters and numbers. The public key gives the user an address to send money to, while the private key unlocks the data so the other party can receive the money. While anyone can obtain the address to send money to, only the recipient has the key to receive the money. This type of cryptography has changed the online payment industry.
The disadvantage of using public key cryptography is the time involved in the encryption. There are other, faster ways to encrypt information, and many users prefer to use a combination of public and private keys to have the ease of the public key system and the security of the private key system.
Private key cryptography
Symmetric cryptography, also known as secret key or private key cryptography, uses a single key to encrypt and decrypt data. While this method is an older and simpler form of data encryption, it’s the preferred type of cryptography for certain applications, such as credit card transactions, where the identity of the card's user needs to be protected to prevent fraud. Another use of this type of cryptography is when you need to validate that the sender of a message is who they say they are.
The drawback of secret key cryptography is that every use of a key creates leaks of information that hackers can use to reconstruct the key. Users of this method should ensure that they don’t overuse master encryption keys to prevent others from taking advantage of the leaked information. Those using this method for large-scale communications find it extremely difficult to track the expiration of keys and rotate the keys enough to prevent others from discovering the information.
Hashing is a cryptographic method that transforms any form of data into a string of text by converting readable data into unreadable text, securing the information. While it’s very efficient to hash information, the difficulty with this method comes when the recipient of the information wishes to decipher it. Unlike public and secret key cryptography, hashing is a one-way road in which you can’t return the string of text you create to its initial, readable form.
An example of hashing is when you apply for a credit card on your bank's website. The bank's system requires you to create a password to access your account, but it doesn’t save the password in its system. Instead, the bank runs the password through a hashing algorithm and saves the hash as the password.
How cryptography works in cryptocurrency
Cryptography allows cryptocurrency transactions to be anonymous, secure and trustless. Trustless means that the parties involved in the transaction don't need to know anything about the other party to complete a transaction with them, and they don't need to rely on a third-party intermediary.
Bitcoin revolutionized the public–private key system by using a peer-to-peer network to verify the transaction's authenticity. Hashing generates the public key from the private key, providing a greater source of protection for sensitive information, as no one can guess the private key simply by accessing the public key.
The drawbacks of cryptography in cryptocurrency transactions
Cryptography provides several benefits for those wishing to purchase or sell cryptocurrency, the most important of which is the secure exchange of private financial information. However, there are some drawbacks to using cryptography in cryptocurrency.
Cryptocurrency requires you to keep a crypto wallet to secure your currency. A crypto wallet is either a software or a hardware wallet, depending on whether you access the information via a smartphone or desktop, or whether the information is stored offline on a piece of hardware connected to your computer via a USB or other port to facilitate transfers or transactions. Unfortunately, if you lose your software or hardware wallet that contains your private key, you could lose access to your funds. Additionally, the creation of large amounts of encrypted data can be electricity intensive.
The future of cryptography
Five years ago, only a small minority had ever heard of blockchain, a platform for recording transactions that facilitates the trading of cryptocurrencies by linking many computers in a peer-to-peer network. However, as more investors discover the effectiveness of the blockchain platform in securing and centralizing the exchange of information, the more mainstream it becomes. Large organizations, including banks and hospitals, are now experimenting with blockchain technology as a way to securely manage high volumes of sensitive data.
Homomorphic encryption is an old concept that is now becoming a reality, allowing data encryption without a key. Instead, it allows the data user to use a third party, such as a cloud provider, to apply the encryption without needing to reveal the values of the data.
With the rise of quantum computing — the ability to break widely used cryptography methods — the focus has turned to the creation of new algorithms that can keep information secure and avoid the compromise of sensitive digital communication. Some of the possible solutions to the problem include lattice-based cryptography, code-based cryptography, multivariate polynomial cryptography and hash-based signatures.
Another cryptography model that is gaining traction is bring your own encryption (BYOE), which involves a data owner generating and using their own encryption keys. Unfortunately, this method replicates many of the problems with usernames and passwords but adds additional complexity. Additionally, the data you encrypt remains in plain text within the memory of the processing system where you created it. Anyone with access to that system can read the data and view the key.