Cryptography and Private keys explained

In the previous article we unveiled the mystery of cryptocurrency and why it's so important in today's highly connected world. Let's take a moment to dive a bit deeper into the tech and see how exactly cryptocurrency works. Again, don't panic! We won't use any difficult jargon here.

It all starts with cryptography

Remember the old WW2 movies where the German army used the infamous Enigma machine? This was one of the best examples of cryptography in action. Scrambled messages could be sent from high command to the entire army — nobody except the sender and receiver could read the original message.

In this example the message can be encrypted (scrambled) and decrypted (unscrambled) in order to read it. The SHA256 hashing algorithm works in just one direction — you can encrypt a message, but you can't decrypt it. The SHA256 algorithm is so powerful that there are almost infinite amounts of combinations. Nobody — not even the fastest supercomputer — can decrypt these seemingly random letters and numbers. And this is exactly how blockchain technology works in a safe and secure way.

Private key

It all starts with the private key. It looks like the same random string of letters and numbers as we saw above and this key is randomly generated by your wallet.

This private key is literally a Swiss Bank in your pocket. Here's what you can do with your private key:

• Generate an almost infinite number of public addresses (like a bank would create bank accounts for its clients). These public addresses can be shared freely with anyone who wants to send you coins or tokens.
• Sign transactions. Any time you send your coins and tokens, you need to "authorize" this transaction using your private key.
• Manage your digital assets. Using your private key, you can mathematically prove to anyone in the world that you own a certain amount of coins and tokens.
• Transfer ownership. When you decide to give your private key to your wife or children, they become the owners of all your coins and tokens.

Now you see that when you install a cryptocurrency wallet on your phone or pc, you literally gain access to the entire financial system that's working on the blockchain. You did it all without proving your identity or jumping through bureaucratic hoops. All you needed was a digital device and internet access.

Blockchain

Any time you use your wallet to send or receive a transaction, there's an invisible digital orchestra taking place in the background. Your private key signs the transaction, your wallet sends it to the blockchain network, millions of computers validate it and prove it to be "true", the transaction data is bundled into a "block" of data, and the block is hashed and attached to the long chain of previous transactions.

You may think: "what would happen if a bad actor tries to modify the data?" Here's where the magic of cryptography comes into play. Remember, even when we change a single character the entire hash output immediately changes. Millions of decentralized computers around the world would detect this nefarious activity and promptly reject it. Thanks to cryptography any attempt to alter past data on the blockchain would result in the corruption of the entire data — and that is something nobody will allow!

Today the technology has come so far that it's actually possible to run entire decentralized applications (Dapps) directly on the blockchain. People use these Dapps for DeFi (Decentralized Finance). Today banks, governments and large organizations are looking at blockchain technology with great interest. In a few years all of us will be familiar with the Blockchain in the same way we use email and mobile devices.