Cryptocurrencies use cryptography to protect transactions and data from unauthorized access or manipulation, which is why they are called cryptocurrencies. Cryptography serves two main functions:
- Maintaining user identity privacy.
- Verifying the authenticity of transactions.
Maintaining user identity privacy#
In the world of cryptocurrencies, users first generate a pair of "public key" and "private key" based on asymmetric encryption algorithms. The public key can be shared openly as it is not sensitive, but the private key must be kept strictly confidential. When I need to transfer funds to you, I only need to know your public key, similar to a bank account number.
Because the "public key/private key" pair is randomly generated through encryption algorithms, the public key is pseudo-anonymous, making it difficult to identify the user behind the transaction and protecting the user's identity information.
Verifying the authenticity of transactions#
When I need to transfer funds to you, I use my own private key to digitally sign the transaction. The transaction is then sent to the network, where nodes verify the digital signature using my public key and ensure that the sender has enough funds to validate the transaction. If the verification is successful, it proves that the transaction was initiated by the private key holder, which is me, and the transaction is permanently recorded in a new block.
Conclusion#
Cryptocurrencies like Bitcoin and Ethereum are called cryptocurrencies because they utilize various cryptographic techniques such as generating public-private key pairs, digital signatures, etc., to ensure their security.