Cryptocurrency

[Husna QA]

I adapted the following article from several references; hopefully, it can help add insight.
For a more detailed explanation, please refer to the source.

Indonesian translation: Mata Uang Kripto - Husna QA

Table of contents:
1. Basics of Cryptography
   a. Asymmetric Cryptography
   b. Digital Signature
   -in process-
   c. Hash Function
2. History of Cryptocurrencies
   a. Bitcoin Prehistory
3. Definition of Cryptocurrency
4. How Cryptocurrencies Work
   - Users
   - Cryptocurrency service providers
   - Blockchain
   - Transaction Data
   - Peer-To-Peer Network
   - Full Node/Server and Simplified Payment Verification/SPV Client
   - Miners (Verifiers)

Reference

1. Basics of Cryptography
back to the table of contents

As reflected in its name, cryptocurrency utilizes cryptographic techniques in its system. As an essential part of the cryptocurrency system, there would be no cryptocurrency without cryptography. Two cryptographic methods that are particularly important in a cryptocurrency system are digital signatures and hash functions.

1a. Asymmetric Cryptography
back to the table of contents

By definition, asymmetric cryptography is a cryptographic technique using a public and private key pair. These two keys are used in different ways. The public key, like a phone number, can be shared with others. While the private key must be well guarded like guarding an ATM (Automated Teller Machine) PIN, of course, the private key does not need to be memorized one by one :)


Asymmetric Cryptography Image. Source: https://en.wikipedia.org/wiki/Public-key_cryptography

How asymmetric cryptography works in general, can be seen in the figure above.
Bob wants to send Alice a secret message that no one but Alice should know. The secret message is then encrypted by Bob using Alice's public key, which results in an encrypted message. The encrypted message is then sent to Alice, who can read the secret message after decrypting the information received from Bob.

Definitions of Encryption and Decryption can be found here: https://en.wikipedia.org/wiki/Encryption.

The assumption in asymmetric cryptography is that others cannot guess the private key even if they have information about someone's public key. One of the most recognized types of asymmetric cryptography is RSA, created by Ron Rivest, Adi Shamir, and Leonard Adlemen.

Reference
back to the table of contents

- https://en.wikipedia.org/wiki/Public-key_cryptography
- https://en.wikipedia.org/wiki/Encryption
- R.L. Rivest, A. Shamir, and L. Adleman - A method for obtaining digital signatures and public-key cryptosystems
- Dimaz Ankaa Wijaya - Bitcoin Mining dan Cryptocurrency lainnya ...., Jasakom 2018, page 5-6

[Husna QA]

1b. Digital Signature
back to the table of contents

Digital signatures are an essential component of cryptocurrency systems. In general, the benefits of digital signatures are as follows:

• Authentication: Ensure that a known party creates the digital signature.
• Non-repudiation: ensuring that the creator of the signature cannot deny that they have created the signature.
• Integrity: ensuring that the information to which the signature is affixed has not undergone any unauthorized changes.

These three elements are essential in cryptocurrency, as the user's real identity is not required for financial transactions (except for anything related to the cryptocurrency market, which requires proof of identity).

Digital signatures ensure that only the money's rightful owner can use it. While digital signatures are not the only method of authenticating transactions, they are the primary method highly recommended.

In addition, digital signatures also ensure that the transaction data is unaltered. For example, Alice wants to send 0.5 XBT (one of the symbols of Bitcoin) of cryptocurrency to Bob. With a digital signature, Alice cannot deny that she sent the money to Bob.

Using the same example, it happens that Carol, who controls Alice's Internet network, can capture Alice's transaction information. Tempted by the high price of Bitcoin, Carol tries to modify the transaction data, which should be sent to Bob to Carol (herself). Digital signatures can detect this change, and the system can reject the altered transaction.

Digital signatures are one of the products that use asymmetric cryptography technology. How it works can be seen in the following image:



Figure How a digital signature works. Source: https://en.wikipedia.org/wiki/Electronic_signature#Digital_signature.

The two algorithms associated with digital signatures are the signing and verification algorithms. If you look closely, the process in the signing algorithm is a modification of the encryption process, as shown in the Asymmetric Cryptography figure (see section 1a. Asymmetric Cryptography) and a combination with hash techniques. In the signing process, the signer uses his private key to encrypt the hash value of the signed electronic document. This process results in a digital signature that can be attached to the electronic document.

The digital signature verification process is the reverse of the signing process. First, the electronic document and the digital signature are separated. The digital signature is then decrypted using the signer's public key, which was obtained previously. The result of this process is a hash value, which is then compared with the hash value of the electronic document. If both hash values are identical, then it can be said that the digital signature is valid.

Reference
back to the table of contents

- https://en.wikipedia.org/wiki/Digital_signature
- https://en.wikipedia.org/wiki/Electronic_signature#Digital_signature
- Dimaz Ankaa Wijaya - Bitcoin Mining dan Cryptocurrency lainnya ...., Jasakom 2018, page 7-8