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Cryptography and Cryptocurrency

The weight of cryptocurrency lies in its secure, anonymous and decentralised nature. This is achieved with the support of cryptography.

Cryptography is the means of protecting information and communications through the use of unintelligible text or codes so that only those for whom the information is intended can decrypt, read and process it. The prefix ‘crypto’ means ‘hidden, secret’ and the suffix ‘graphy’ refers to handwriting.

In computer science, cryptography uses mathematical concepts of calculations, called algorithms, which are based on rules to transform messages into codes. Cryptography has been in use for a long time — the most famous example of its use being that during wartime, when lives of peoples from entire nations depended on obscuring and protecting information. But modern cryptography is used in many applications like banking transaction cards, computer passwords and e-commerce transactions. In its current avatar, it is based on the following key principles:

  • Data Confidentiality: Information can not be decrypted or understood by anyone.
  • Data Integrity: The information, once transformed into codes, can not be altered.
  • Authenticity: Sender and receiver can each confirm the same information
  • Non-repudiation: Sender can not deny his/her intentions in the transmission of the information at a later stage.

There are three kinds of cryptographic techniques: symmetric key cryptography, hash functions and public-key cryptography. The third technique, public-key cryptography, is what is employed in cryptocurrency, putting the ‘crypto’ in cryptocurrency. The weight of cryptocurrency lies in its secure, anonymous and decentralised nature. What makes it truly democratic is its peer-to-peer architecture within which individuals can transfer funds and other digital assets without the intervention of a central authority. The system is thus supported on public-key cryptography — which helps secure transactions, control the creation of additional units and verify the transfer of assets.

In public-key cryptography, the user is given a public and a private key. Both keys are encrypted and take the form of a random combination of numbers and letters. Each combination runs to a length of about 30 characters long and looks something like this: YHUjghH6Jk98d3B4NW0234lWP34PP0.

The public key gives users on the cryptocurrency network an address to send money to. The holder of the account has a private key to unlock the public key and receive the money sent to him/her. This implies that only the one who knows the private key can unlock the public key.

On the web, the browser contacts the server to get a public key from it. The private key is only stored on that server but the data cannot be decrypted to read what it is while it is travelling through routers or internet service providers. Only the encrypted data reaches the server before it decrypts it to decipher the contents and process it.

Another cryptography method which cryptocurrency depends on is called Hashing — a method used to verify the integrity of data of transactions on the network. Every transaction conducted on the blockchain is encapsulated with a Hash. It maintains the structure of the data, encodes people’s account addresses, is central to encrypting transactions that occur between accounts and supports block mining. The cryptography process is further buttressed by the use of digital signatures — required by genuine parties to prove their identities to the network.

Since these networks run outside the jurisdiction of central banks, anonymity and concealment are a key aspect of cryptocurrencies. Cryptographic techniques make sure that all participants, as well as their actions remain encoded and that no foreign entity can tamper with these fool-proof codes that carry vital information.

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