Cryptocurrencies employ a form of cryptography known as public-key cryptography. Two cryptographic keys form the core of this system: a public key and a private key. These are strings of characters that are used for encrypting and decrypting data, as well as for signing and verifying transactions.
The public key is visible to everyone on the network and is usually the basis for generating the blockchain address. The private key, on the other hand, works somewhat like a password and is known only to the person who owns the address.
Public and private keys essentials
- Public and private keys are the basis of public-key cryptography.
- The public key is known to everyone, while the private key is confidential.
- The public key is used for encrypting data and validating transactions.
- The private key is used for decrypting data and signing transactions.
- The blockchain address is usually generated from the public key.
Symmetric vs asymmetric cryptography
Public-key cryptography is military-grade technology turned open source. Its distinctive feature is that it’s asymmetric, which means that instead of using a single key to encrypt and decrypt information, a set of two cryptographic keys is used: the public and the private key.
If you want to protect your data with symmetric cryptography, everyone involved has to have access to a universal key. This key allows the participants to scramble data before transmitting it, which prevents everyone else from reading it, if the transmission is intercepted. The key is also used to decrypt the data upon reception. However, this system is vulnerable, because the whole process is compromised if the key leaks.
Asymmetric cryptography does not use a single key, but instead allows every participant to get their own, unique set of keys: a public key that is known to everyone and is used to identify a participant, and a corresponding private key that no one else knows. Since the keys are inherently mathematically connected, the private key enables its owner to prove that they are the legitimate person behind a public key.
On a blockchain network, transactions are made from address to address, which is to say from one owner of a public key to another owner of a public key. The only way to prove that your transaction is legitimate is to sign (that is, encrypt) it with your private key. Your public key being known, anyone can easily check if the transaction really did come from you.
In an asymmetric system, if a private key is leaked, only the address it corresponds to is compromised. Everyone else remains safe and sound. But losing your private key means losing your funds forever, with no option of recovery, as you would not be able to create digital signatures anymore, to prove which public keys belong to you.
Advantages of public-key cryptography
Public key-cryptography is essential for the operation of blockchain as we know it. It is used as a means of authentication, where a digital signature verifies the owner of the public address. At the same time, the signature ensures integrity and verifies the contents of the encrypted information, preventing any changes from being made to the original later on.
Since private keys are secret and known only to their owners, users of a blockchain network can rely on complete confidentiality, even though their transactions are recorded on a public ledger. While allowing users to remain pseudonymous (see how), public-key cryptography ensures that as long as the private key is safely in its owner’s possession, they are the only one who can ever make transactions from their address.
To make use of the advantages of asymmetric cryptography, your private keys must remain secret and you should back them up, in case your wallet gets lost or breaks down. Read this article to find out how to securely store cryptocurrency. If you decide to keep your cryptocurrency at an exchange, it is important to choose a reliable one.
Reputable exchanges like Bitstamp go to great lengths to protect their wallets and ensure the security of users' funds. Bitstamp is the world’s longest-running exchange with a proven track record in safety and reliability.
This webpage has been approved as a financial promotion by Bitstamp UK Limited which is registered with the UK’s Financial Conduct Authority. Please read the Risk Warning Statement before investing. Cryptoassets and cryptoasset services are not regulated by the Financial Conduct Authority. You are unlikely to be protected if something goes wrong. Your investment may go down as well as up. You may be liable to pay Capital Gains Tax on any profits you earn.