Cryptography is at the core of cryptocurrency, it's a fundamental process required to enable secure transactions. Having said that, cryptography is not a new concept, so let's break it down and make sense of how it is applied in the world of cryptocurrency.
- Public & Private Keys
- Digital Signatures
Public & Private Keys
The basics of cryptography entail the use of public and private keys to encrypt and decrypt data. Think of your public key as a tool that is used to create different wallet addresses. These addresses are publicly visible and like an email address, these addresses are unique to you, just like your public key. You are free to share these wallet addresses as it allows people to send you cryptocurrency on the blockchain. Your private key on the other hand, like a password, allows you to access and control the cryptocurrencies you own on the blockchain and for that reason, it should never be shared.
How are these keys generated? When using a web or mobile wallet your private key is generated for you. Hence, you are entrusting a third party to create and manage your private key, with the expectation that they won't use it maliciously.
With a hardware wallet, you generate your private keys (or seed phrase) which the device converts into cryptographic code. This is one of the greatest reasons for taking full self-custody of your crypto as it reduces your private key exposure.
The public key is generated from the private key. As mentioned, the public key can be shared with anyone and it allows people to send you cryptocurrency. No one can access your assets from knowing your public key.
Now, we know how public and private keys are created, but how can you verify the identity of someone making a transaction?
Going back to our earlier point, your private key is your proof of digital asset ownership, so could you not just share your private key to prove your identity? Well, whilst it is true that this would prove your identity it would also give the recipient complete access to your cryptocurrency - so this might not be the best idea.
Instead, digital signatures are used to safely verify your identity.
The digital signature is derived from your private key using a method called hashing. This signature proves that you are in fact who you say you are. Most importantly, this means that you do not need to expose your private key to verify your identity. This is a key feature of hardware wallets, which enables you to sign transactions without exposing your private key.
To recap, your public and private keys are both important - however, remember that your private key gives you ownership over your crypto assets. If you are still using a web/mobile wallet we strongly urge you to consider making the switch to a highly secure hardware wallet and taking full ownership of your cryptocurrency.