The syllable "crypto" in the word "cryptocurrency" comes from Greek and means "secret." This gives you a hint about what the field of cryptography involves. Cryptography is the theory and practice of sending secure and encrypted messages or data between two or more parties. The sender "encrypts" the message, making it unreadable to third parties, while the recipient "decrypts" it, making it readable again.
Cryptocurrencies use cryptographic methods for anonymous and secure transactions that don't require a middleman ("trustless"). This means you don't need to know your transaction partner, nor do you need a bank, credit card company, government agency, or any other third party as an intermediary. The importance of cryptography extends beyond digital money. Our computers and the networks they are connected to constantly encrypt and decrypt data, from every Google search you perform to every email you send.
Why is cryptography important?
Cryptocurrencies rely entirely on cryptographic concepts. Bitcoin was invented by a person (or group) under the pseudonym Satoshi Nakamoto, who outlined their approach in a whitepaper published in a cryptography forum in 2009.
The most challenging problem Nakamoto solved was the "double-spend" problem. Bitcoin exists solely as lines of code. How can you prevent Bitcoin owners from simply copying and spending their money? Nakamoto's solution relied on a well-known encryption method called public-key cryptography.
Bitcoin (along with Ethereum and many other cryptocurrencies) uses a technology called public-key cryptography, which involves public and private keys. This makes these cryptocurrencies "trustless," enabling secure transactions between strangers. "Trustless" means that Bitcoin and other cryptocurrencies operate without a "trusted intermediary" like a bank or PayPal.
How does public-key cryptography work?
The Bitcoin network assigns every user a private key (essentially a very secure password), from which a corresponding public key is generated using a cryptographic algorithm. You can share your public key freely. To send you Bitcoin, someone only needs this public key. However, to access the funds, the private key is required.
The revolution sparked by Bitcoin is partly due to Nakamoto's solution to the "double-spend" problem: a peer-to-peer network that uses cryptographic methods to verify the authenticity of transactions.
Your public key is generated from your private key through a process called "hashing," where an algorithm processes a string of data. This process is irreversible, so no one can deduce your private key from your public key.
Because your public and private keys are linked, the network knows that your Bitcoin belongs to you. As long as you keep your private key secure, your Bitcoin remains yours.
Bitcoin's lack of intermediaries means that Bitcoin transactions are irreversible (since there is no credit card company to call if you make a mistake). This irreversibility is crucial to solving the "double-spend" problem.
The other part of the solution is the Bitcoin blockchain, a massive decentralized ledger comparable to a bank's balance sheet. This ledger records every transaction and is constantly verified and updated by all the computers in the network.
