Blockchain technology is known for its high level of security. But how does this decentralized system work without the backing of a central authority? It’s a question that has intrigued many over the past decade, especially considering that Bitcoin, one of the most popular cryptocurrencies built on blockchain, has never been hacked. It’s important to note that a user’s security details being compromised are not the same as the Bitcoin Protocol or Network being hacked. So, what makes blockchains so secure? The answer is cryptography, which plays a crucial role in the security of cryptocurrencies like Bitcoin.
What is Cryptography?
Cryptography is a computer algorithm-based technique used to protect data and information, ensuring that only the intended recipient(s), entity, or destination can access the content of the message. This is achieved by disguising information or messages using rule-based mathematical algorithms to make them unreadable across various communication channels.
Despite popular belief, many popular cryptocurrencies and blockchains are built on public blockchains that lack centralized servers or high-tech firewalls. Furthermore, they operate on peer-to-peer networks that could be assumed vulnerable to attacks or hacks. However, blockchain technology, combined with other innovations, has revolutionized the 21st century, primarily due to the benefits of cryptography. Below are the four main cryptography standards:
- Confidentiality — It protects the confidentiality of private messages from unauthorized access. Confidentiality strengthens the privacy of information and data.
- Data Integrity — Data, information, or messages sent cannot be altered during transit or storage.
- Non-repudiation — Since the encrypting leaves a digital signature on the message, the sender cannot deny sending it.
- Authentification — Cryptography allows the sender and receiver to verify each other’s identity, simultaneously proving the message’s origin and destination.
There are two types of cryptography: symmetric and asymmetric. Symmetric uses a single key, while asymmetric uses two keys, making it more secure. Most blockchains use asymmetric-key cryptography, also known as public-key cryptography. Asymmetric cryptography involves a public key and a private key, and there is a permanent connection between these keys.
The public key can be shared, but the owner should keep the private key private to prevent unauthorized access to encrypted data. Sharing one’s private key can result in a loss of funds in cryptocurrency transactions (e.g., Bitcoin, Ethereum, etc.). To better understand this concept, think of the public key as your email address and the private key as the password to access your email. Your email address (public key) can be used to send messages to you and share documents, and you can also use it to receive funds on platforms like PayPal, Binance, and TransferWise.
However, just as sharing your email password can be dangerous, sharing your private key can also have severe consequences. Strangers could access your personal information and digital identity, potentially leading to fraud. While public and private keys are more complex and secure than email technology, the email illustration provides a useful analogy. In summary, a public key is meant for public use, while a private key should remain confidential and used only by the owner.
The Concept of Cryptography in Cryptocurrency
Cryptocurrency is a prominent example of how public-key cryptography is used. Cryptocurrencies enable the sending and receiving of funds without the need for third-party verification, like banks. To receive cryptocurrency, you share your wallet address which is made possible through your public key. The sender forwards the fund (coin) to your address, but you access it with your private key, which is paired with your public key. It’s crucial to protect your private key because anyone with access to it can access any cryptocurrency associated with it.
While many people have used cryptocurrency for years, they may not know about the “behind the scenes” explanation above. Private keys are stored in your cryptocurrency wallet, which can be a mobile, desktop, web, or hardware wallet. If your cryptocurrencies are stored on exchanges like Binance and Coinbase web wallet, the exchanges are the custodian of your private keys. On the other hand, if you use a hardware wallet or other non-custodial wallets, you are in control of your private keys.
Private keys consist of a long string of letters and numbers, so there is a high risk of transcribing errors when using them to sign transactions digitally. To combat this issue, many wallets use seed phrases instead of private keys. Seed phrases are secret recovery phrases or mnemonic seeds that consist of 12 to 24 words derived from the BIP 39 standard word list. They do not replace your private keys, but they make managing them easier by reducing the risk of error when using them. When seed phrases are entered correctly, the wallet platform uses your private key to digitally sign off a transaction, just like signing a transaction directly with your private key. The seed phrase isn’t the same for all wallets, but it’s often easier to remember or store a long string of words than a long string of letters and numbers (private key).
Through advanced cryptography, blockchain, and cryptocurrency transactions are encrypted using cryptographic hash functions, thereby creating hash values. This technology and other developments make crypto transactions and the blockchain ecosystem secure, reliable, and impenetrable. For bad actors to infiltrate this decentralized network, extremely high computational power and a lot of trials are needed. Cryptography is also applied in other fields seeing its positive impact in the blockchain world — fields such as digital rights management, e-commerce, information security, and military & intelligence.
Cryptocurrency transactions are secured through advanced cryptography, blockchain and encrypted using cryptographic hash functions that generate hash values. These cutting-edge technologies ensure the blockchain ecosystem is secure, reliable, and impenetrable. The decentralized network is incredibly resistant to infiltration by bad actors, who would need massive computational power and many attempts to break through. Beyond the blockchain world, cryptography is also finding use in other fields, such as digital rights management, e-commerce, information security, and military and intelligence. With its numerous benefits, cryptography is quickly becoming an essential for ensuring secure transactions and protecting sensitive data.
Blockchain is the future, and it is impressive to see Identity.com contributing to this desired future through the Solana ecosystem and other Web3 projects. Also, as a member of the World Wide Web Consortium (W3C), the standards body for the World Wide Web.
Identity.com, as a future-oriented company, is an open-source ecosystem providing access to on-chain and secure identity verification for businesses, giving their customers a hassle-free experience. Our solutions improve the user experience and reduce onboarding friction through reusable and interoperable Gateway Passes. Please refer to our docs about how to help you with identity verification and general KYC processes.