Cryptocurrency is a digital payment system that doesn't rely on banks to verify transactions. It’s a peer-to-peer system that can enable anyone anywhere to send and receive payments. Instead of being physical money carried around and exchanged in the real world, cryptocurrency payments exist purely as digital entries to an online database describing specific transactions. When you transfer cryptocurrency funds, the transactions are recorded in a public ledger. Cryptocurrency is stored in digital wallets.
Cryptocurrencies do not exist as a stack of notes or coins. Instead, they live only on the internet. Consider them virtual tokens, the value of which is decided by market forces created by those seeking to purchase or sell them.
Cryptocurrency received its name because it uses encryption to verify transactions. This means advanced coding is involved in storing and transmitting cryptocurrency data between wallets and to public ledgers. The aim of encryption is to provide security and safety.
They are distinguished from fiat currencies, such as the dollar because they're not issued or backed by a government. No single person, company, or government controls a crypto's blockchain. Instead, they're run by a decentralized network of computers around the world.
"Cryptocurrencies can have many different uses. Some are used in gaming environments to earn rewards in a game, while others facilitate payments. Some are designed for cross-border remittances … some are designed for micropayments."
The lack of a central authority can also make cryptocurrencies more secure. "It's hack-proof because there's no one central point of failure,"
The word “crypto” refers to the special system of encrypting and decrypting information – known as cryptography – which is used to secure all transactions sent between users. Cryptography plays a vitally important role in allowing users to freely transact tokens and coins between one another without the need for an intermediary like a bank to keep track of each person balance and ensure the network remains secure.
Cryptocurrencies use cryptography to encrypt sensitive information, including the private keys – long alphanumeric strings of characters – of crypto holders. Think of private keys as the passwords that determine the ownership of cryptocurrencies. Keep in mind that cryptocurrencies can not be stored outside of the blockchain. They are permanently based on the blockchain. Hence, when someone says they own X amount of coins, what they really mean is that their password can legitimately claim X amount of coins on the blockchain.
These private keys are what crypto holders store on their wallets, which, as you must have guessed, are special kinds of software or devices designed specifically for this purpose. In instances where a crypto holder loses access to his or her private key, the cryptocurrencies associated with such keys could be lost permanently.
Cryptography focuses on four different objectives:
Confidentiality: Confidentiality ensures that only the intended recipient can decrypt the message and read its contents.
Non-repudiation: Non-repudiation means the sender of the message cannot backtrack in the future and deny their reasons for sending or creating the message.
Integrity: Integrityfocuses on the ability to be certain that the information contained within the message cannot be modified while in storage or transit.
Authenticity: Authenticity ensures the sender and recipient can verify each other's identities and the destination of the message.
It also solves a problem that used to make middlemen like banks indispensable – the double-spend issue: when a person attempts to spend the same balance twice with two different parties.
With the help of a cryptographic technique, private keys are encrypted to create wallet addresses, which can be likened to bank account numbers. In essence, you need your private key to digitally sign transactions. This is essentially like broadcasting to everyone in the network, “I confirm I am sending this amount of X coin to this person.” In contrast, wallet addresses indicate the destination of transactions.
In a normal bitcoin transaction, first, there are the transaction details: whom you want to send the bitcoins to and how many bitcoins you want to send. Then the information is passed through a hashing algorithm. Bitcoin, as mentioned, uses the SHA-256 algorithm. The output is then passed through a signature algorithm with the user’s private key, used to uniquely identify the user. The digitally signed output is then distributed across the network for other users to verify. This is done by using the sender's public key.
The users who check the transaction to see whether it's valid or not are known as miners. After this is done, the transaction and several others are added to the blockchain, where the details cannot be changed. The SHA-256 algorithm looks something like in the image below.
The encryptions are executed in only one direction, which makes it impossible to derive private keys from a person’s wallet addresses.
To understand in a more clear way how cryptography may be applied to a piece of data. Before the days of modern technology, transposition ciphers were used to rearrange the letters in a message. For example, a message that read NRGEE SRGAS may be put through a transposition cipher to reposition the letters so that they read GREEN GRASS. This is a very basic use of the concept of cryptography. However, it was very popular in ancient times, called the Ceasar cipher which is very popular and is something you could look up.
The methods of implementing cryptography to data have become significantly more complex. Now, incredibly complex computer and mathematical technology can be used to encrypt modern-day complicated ways than ever before. Some of the technology is now being used for modern-day cryptocurrencies. No matter how complicated cryptography is, it always works on the same basic principle; encrypt data and hide its true meaning so that only a person with permission can decipher it.
Why are cryptocurrency and its implementation technology so popular?
New uses for cryptocurrency and blockchain technology are developing all the time. From new decentralized finance (or Defi) apps to blockchain games to non-fungible tokens (NFTs), the industry is constantly evolving. Additionally, more retailers and service providers are accepting cryptocurrency as payment.
Attractive investment. The value of cryptocurrency as an asset class has skyrocketed over the past five years. At that time, it shifted from a niche topic to receiving lots of buzz in the mainstream media. Many people see it as an attractive asset class to invest in to produce outsized returns.
Futurism. Many people believe cryptocurrency is the future of money. Indeed, many businesses across various industries are developing ways to use blockchain technology to improve operations. We could still be in the very early days of cryptocurrency.