Advances in computer technology have made data more accessible, and although this may offer a huge advantage, it has a downside as well. Online data is exposed to many threats, including theft and corruption. Cryptography (or cryptology) is one solution that has made it possible to protect information from some of the risks associated with data storage and distribution. It is not to say that the concept of encrypting data is new. Even before the digital era, people have been masking messages to prevent unintended audiences from reading them. But the increased use of computing devices brought the science of encryption to a whole new level.
In a few words, cryptography is the science of hiding information. More specifically, modern cryptography makes use of mathematical theories and computation to encrypt and decrypt data or to guarantee the integrity and authenticity of the information.
In a basic process of text encryption, a plaintext (data that can be clearly understood) undergoes an encryption process that turns it into ciphertext (which is unreadable). By doing this, one can guarantee that the information sent can only be read by a person in possession of a specific decryption key.
By using specific cryptographic techniques, one is able to send sensitive data even over unsecured networks. The level of encryption will depend on the degree of protection that the data requires. For instance, the type of security used on regular personal files (like contacts) is not the same as the one used on cryptocurrency networks.
Learning how cryptography works is critical to understanding its importance within cryptocurrency systems. Most blockchain systems, such as the one of Bitcoin, make use of a particular set of cryptographic techniques that allow them to function as a decentralized and public ledger, through which digital transactions can take place in a very secure way.
The modern cryptography consists of various areas of study, but some of the most relevant are the ones that deal with symmetric encryption, asymmetric encryption, hash functions, and digital signatures.
The Bitcoin protocol makes use of cryptographic proofs in order to secure the network and to ensure the validity of each transaction. Digital signatures guarantee that each user is only able to spend the funds of his own wallet and that these funds can't be spent more than once. For instance, if Alice sends 2 bitcoins to Bob, she creates a transaction that is, essentially, a message that confirms the addition of 2 bitcoins to Bob’s wallet, while removing the coins from Alice’s wallet. However, she is only able to do so by providing a digital signature.
Another important element of the Bitcoin Protocol is the Hashcash function, which defines the Proof of Work consensus mechanism and the mining process (responsible for securing the network, validating transactions and generating new coins). Hashcash makes use of a cryptographic function called SHA-256.
Cryptography is an essential part of the blockchain technology and, therefore, is crucial for any cryptocurrency. Cryptographic proofs applied to distributed networks enabled the creation of trustless economic systems, giving birth to Bitcoin and other decentralized digital currencies.