Cryptography is the method and practice of sending secure and encrypted messages between two or more parties. Cryptography allows digital money transactions to be carried out securely and ‘trustlessly’ using a pseudonym. In other words, there is no need for a bank or intermediary.
The ‘crypto’ in the word ‘cryptocurrency’ means ‘secret’ in Greek. This gives you a clue as to what the field of cryptography is all about. Cryptography is the science and practice of sending secure and encrypted messages or data between two or more parties. The sender ‘encrypts’ the message, hiding it from third parties, while the receiver ‘decrypts’ the message, making it readable again.
Cryptocurrencies use cryptography to ensure that transactions are anonymous, secure and ‘trustless’. This means that you can make secure transactions with a person without knowing anything about them. Also, there is no need for a bank, credit card company, government or any other third party to be involved. Digital currencies are not the only place where cryptography is important. Our computer and the networks it’s connected to are constantly encrypting and decrypting data, from every Google search you do to every email you send.
Why is cryptography important?
Cryptocurrencies are based entirely on cryptographic ideas. Bitcoin was created in 2009 by a person (or group) using the pseudonym Satoshi Nakamoto. Nakamoto had posted the introduction of the idea on a cryptography message board.
The thorniest problem Nakamoto solved was the ‘double-spending problem’. Since Bitcoin was just a code, how could people be prevented from copying the money and spending it again? Nakamoto’s solution was based on a well-known cryptographic scheme called public-private key cryptography.
Bitcoin (Ethereum and many other cryptos) uses a technology called public-private key cryptography. This makes it possible for strangers to make secure transactions without ‘trusting each other’ and without a ‘trusted intermediary’ such as a bank or Paypal.
How does public-private key encryption work?
The Bitcoin network gives all users a private key (which is very much a password) and uses cryptographic methods to generate a public key associated with it. You can freely share your public key with other people. This is the only information needed to send you Bitcoin. But the private key is needed to access your money.
One of the reasons why Bitcoin is revolutionary is its solution to the double-spending problem: A peer-to-peer network that uses cryptographic methods to verify the authenticity of transactions.
Your public key is generated from your private key using a method called ‘hashing’. Also this method takes a string of data and processes it using an algorithm. It is almost impossible to reverse this process. So no one can guess your private key from your public key.
Because your public and private keys are linked, the network knows that the bitcoin belongs to you. As long as you have your private key, that bitcoin remains yours.
Another effect of no intermediaries is that Bitcoin transactions are irreversible (after all, there is no credit card company to call if you make a mistake). However, this is a feature, not a bug: The permanence of transactions is an important part of the solution to the double-spending problem.
The other part of the solution is the Bitcoin blockchain, a giant, decentralised ledger. Also, you can think of it like a bank ledger that documents every transaction and is constantly verified and updated by computers on the network.