As one might have guessed, the word “cryptocurrency” is composed out of two words: “cryptography” and “currency.” One could say that cryptography is an integral part of cryptocurrencies, and that’s very much correct.
In this guide, we will be looking at why that is the case. Why is cryptography and why is it important, how it works, why it is used in cryptocurrency, and how it might be able to evolve in the future, we will answer all these questions below.
What is cryptography?
For starters, it’s important to note that the word cryptography comes from the two Greek words: “Kryptos” and “Graphein.” The first means “Secret” and the latter “Writing.”
Cryptography is an established method of encrypting data or information so that it stays protected from third parties. In short, the encrypted data only becomes readable after it is decoded with a specific, unique key or algorithm.
Contrary to what some might believe, cryptography is not at all a modern concept. There are numerous reports that showcase the use of cryptography for thousands of years. Ancient Egyptians used it, Romans used it (Julius Caesar even developed his own so-called Caesar Cipher), and Germans used it in WW2.
How cryptography works?
The basic process of encryption has two main elements: the cipher, and the key. The cipher is a set of rules that are used to encode the information while the key is used for deciphering a message.
In the olden days, cryptography was used to rearrange the letters within various messages. Nowadays, cryptography has evolved and is not significantly more complex. Thanks to advancements in computing power, we can now encrypt data in more complicated ways.
Why do we need cryptography in cryptocurrency?
On a general level, as mentioned above, cryptography is needed to prevent sensitive data from being compromised and stolen by parties that are not mean to see it.
In order to understand why cryptography is needed, one must first be accustomed to the underlying technology of most crypto projects, the blockchain. The blockchain is a distributed ledger where information about transactions is stored. Any transaction made is reflected in the public ledger. However, the person’s identity is protected by cryptography.
How is cryptography used in Cryptocurrency?
Almost all cryptocurrencies use cryptography for three main reasons: to verify the transfer of assets, to secure transactions, and to control the creation of additional units. Furthermore, two of the functions of cryptocurrency are very useful for the functionality of a blockchain, and these are “signature” and “hash.”
The signature (or more technically called the Digital Signature) is used to verify the identity of a person. In the case of cryptocurrencies, digital signatures are mathematical functions that are matched to specific wallets. Digital signatures are also responsible for wallet identification by secretly matching the public and private key of a wallet.
Hashing is a cryptographic method for transforming large amounts of data into short numbers are difficult to reproduce. The main role of hashing is protecting and integrity of data within the blockchain. It’s main used for making mining possible, for encoding transactions between wallets, to encode wallet addresses, to verify and validate the account balances of wallets.
To do all that, cryptocurrencies use a method called “public key cryptography,” which involves a user having both a public and a private key. Both are encrypted and usually tend to be somewhere around 30 characters long. These ensure that anyone can deposit money to a public key/address, but only people with the private key can access and use the money. Public key cryptography is one of the newest technologies of this sort and is actively helping change the online payment industry.
How might cryptography change in the future?
Answering this question is not exactly simple since there’s really no telling what the future will bring us regarding technology development. For the time being, cryptocurrency cryptography is working really good, hence, there’s really no need to actually change the technology.
Be that as it may, evolution is important, hence, it’s possible that someone sometime will actually manage to invent a method better than public key cryptography. At least, in theory, this could make cryptocurrencies a lot more secure than they already are. At the core of most crypto projects, there’s the public key cryptography previously mentioned.
Even though the concepts between cryptography are extremely old, there are many who consider cryptocurrencies the pinnacle of what this technology has to offer. Be that as it may, it’s important to understand that all cryptocurrencies are still very much in their infancy. With that in mind, it could be argued that, in fact, the true potential of cryptography has yet to be realized.
As cryptocurrencies are slowly but surely clawing their way into the mainstream and continue to disrupt more and more industries (online banking, e-commerce, there’s a very good chance that we will see a lot more innovations, most of which will surely be related to cryptography.