March 23, 2021

Cryptocurrency, why is encryption linked to it?

What is cryptocurrency?

A cryptocurrency, or crypto, is decentralized digital money based on blockchain technology. A digital asset based on a network that is distributed across a large number of computers, cryptocurrency is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. It can be used as a form of payment to buy goods and services, but also as an investment. As this type of currency is unregulated, buyers like to trade it for profit as they would in other assets like stocks and precious metals.

How does cryptocurrency work?

There is no central authority that fixes and maintains the value of crypto. It is a medium of exchange that is digital, encrypted and decentralized. That cryptographic proof comes in the form of transactions that are verified and recorded in a form of program called a blockchain. More than 6,700 different cryptocurrencies are traded publicly, the most popular being Bitcoin and Ethereum. Most supporters of crypto like the fact that these currencies, apart from being decentralized and more secured throughout the process of blockchain, remove central banks from managing the money supply securing it from government interference and manipulation. Many companies have issued their own currencies, often called tokens, and these can be traded specifically for the good or service that the company provides.

Blockchain explained

A blockchain is an open, distributed ledger that records transactions in code enforced by a disparate network of computers. Blockchains are organizational methods for ensuring the integrity of transactional data and play a major role within cryptocurrency exchanges.

A database is a collection of information that is stored electronically on a computer system. Data needs to be structured, and if needed, filtered, to find specific information.

Blockchains differ from specific databases, where data is stored in blocks and chained together. As new data comes in it is entered into a fresh block. Once the block is filled with data it is chained onto the previous block, which chains the data together in chronological order.

Different types of information can be stored on a blockchain but the most common use so far has been as a ledger for transactions. In Bitcoin's case, blockchain is used in a decentralized way so that no single person or group has control. Rather, all users collectively retain control. Decentralized blockchains are immutable, which means that the data entered is irreversible. For Bitcoin, this means that transactions are permanently recorded and viewable to anyone.

Validation techniques

To prevent fraud, each transaction is checked using one of two main validation techniques: proof of work or proof of stake.

Proof of work is a method of verifying transactions on a blockchain in which an algorithm provides a mathematical problem that computers race to solve. This race to solve blockchain puzzles can require an intense amount of computer power and electricity. Each participating computer, often referred to as a "miner," solves a mathematical puzzle that helps verify a group of transactions—referred to as a block—then adds them to the blockchain leger. The first computer to do so successfully is rewarded with a small amount of cryptocurrency for its efforts.

To reduce the amount of power necessary to check transactions, some cryptocurrencies use a proof of stake verification method. With proof of stake, the number of transactions each person can verify is limited by the amount of cryptocurrency they're willing to "stake," or temporarily lock up in a communal safe, for the chance to participate in the process.

Advantages and disadvantages of cryptocurrencies

One of the advantages of cryptocurrency is that the transfers are made easy and exclude the use of a third party such as a bank or credit card company. The exchanges are secured and ensured by public or private keys. On the other hand, a significant disadvantage would be money laundering and tax evasion, making crypto transactions well suited for illegal activities.

What is cryptography?

The word "cryptocurrency" is derived from the word "cryptography" and "currency".

Cryptography implies the use of different encryption techniques which are used to secure a network. It is essentially the practice of encrypting certain data or information so that it can be kept secret from third parties. By converting your private information into a secret code that hides the information's true meaning, you make it almost impossible for an intruder to decrypt it into plaintext. When an encrypted message is intercepted by an unauthorized entity, the inflator has to guess the variables that were used to encrypt the message. The time and difficulty of guessing this information is what makes encryption such a valuable security tool.

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How is cryptography used in cryptocurrency?

Cryptocurrencies use cryptography for three main purposes: to secure transactions, to control the creation of additional units, and to verify the transfer of assets. To accomplish all of these things, cryptocurrencies rely on what is called "public key cryptography".

The various encryption algorithms and cryptographic techniques that safeguard the specific entries are for example elliptical curve encryption, public-private key pairs, and hashing functions.

Public keys give an address to people on where to send the money to. It involves a user having both a public and private key, encrypted in an assortment of around 30 numbers and letters. The purpose of the private key is to unlock the public key in order to receive the money that has been sent. In this way, only the person who knows the private key can unlock the public key. Anyone can deposit money to a public key/address, but only people with the private key can access the money. This allows people to receive money without other people being able to access the money. Public key cryptography is a technological wonder and it is rapidly changing the online payment industry.

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Perhaps the biggest vulnerabilities that public key cryptography faces are people accidentally losing their keys or revealing their private key to other people.

First of all, a person should never share his or private key information with anyone. Hardware wallets can add an extra layer of security. It completely removes one's cryptocurrencies from the internet for storage in a similar way that flash drives remove information from a computer for storage off of the computer. Companies also sell insurances helping cryptocurrency holders from experiencing major losses if a cryptocurrency exchange is hacked.

However, because technology tends to improve over time, it is possible that someone could invent a system that is even better than public key cryptography. If this happens, then many of the main cryptocurrencies will probably be updated to incorporate the developments. This could make cryptocurrencies even more secure, hypothetically.

As more and more people start to use cryptocurrencies, a larger percentage of the population will start to understand just how valuable public key cryptography and cryptocurrencies are. Part of the reason why all of this cryptography technology is being developed is because there is an increased need to store, send, and receive money securely on the internet. Online banking and ecommerce are driving this need. Business and banking are both more efficient when money can safely be transferred online. Public key cryptography is doing a lot to make digital money exchanging and storing safer. Because public key cryptography and cryptocurrencies are helping to improve digital money use and storage, it is very likely that cryptocurrencies will continue to rise in popularity significantly over the next few decades.

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