SFM Labs - Cryptography: What Is It?
This Twitter Space took place on 28.03.22 - 2PM EST/7PM GMT/8PM CEST
A quick disclaimer upfront: all information given in this presentation is researched and intended to be educational and illustrative to the specific topic. Any companies, products, people, or other items mentioned do not constitute an endorsement, recommendation, or relationship. Every owner has to do their due diligence, as the decisions and responsibility about any investment lie with the owner. This is no financial advice.
What is cryptography?
Sending data securely using encryption ("the conversion of data from a readable format into an encoded format") over multiple networks to multiple sources is known as Cryptography. Encryption is used to pass the transaction in digital currency without revealing names, direct details, or basic information. This process is called "trustless," and it is the most anonymous way of sending data in the crypto domain. Depending on how much encryption is necessary (for example, due to different levels, protocols, or requirements), the sending of the data will be different.
As a small side note, the abbreviation "crypto" was originally used as a shortening of the word cryptography, not cryptocurrency.
Why is cryptography important, and what are the benefits?
Cryptocurrencies are based on systems of cryptography. These ensure that transactions work using the simplest and easiest method, public-key encryption and that no transactions are duplicated.
Bitcoin (and later Ethereum) pioneered this system, and all cryptocurrencies in available free wallets use public and private keys. Based on this method, a secure system can be built and emerge. Without this handling, no "trustless" transfer would be possible.
Cryptography as a general entity is not only helpful for trade and transfer but also protective. Private files and information are kept from potential hackers because the data can only be read if the file is decrypted. The resulting privacy has another advantage. If you don't know the person that made a trade, you won't be able to decrypt it from a transaction alone.
How does data encryption work?
The information to be transmitted or transferred by cryptography is recorded in two basic systems, plaintext and ciphertext.
The plaintext is a simple, mostly unencrypted file. It holds information that is easy to recognize and read and therefore is written down without any great security factor. Information like web pages, documents, or important writings are present here and are presented without protection, which is the most inappropriate variant for the transfer, since the information is readable or easily decipherable for everyone.
The ciphertext, on the other hand, represents the unrecognizable or encrypted file. Only users with access or authorization can open and read this file because without access rights there is no way to see what it is.
In order to convert files from plaintext to ciphertext, encryption algorithms prepare and convert the information for a secure transaction or transfer over a network.
What algorithms do cryptography use?
There are many different approaches in cryptography, but most of them are modifications or extensions of established encryption methods and only differ slightly in their algorithms. The four methods used to encrypt files are symmetric encryption, asymmetric encryption (including digital signatures), and hash functions.
1. Symmetric Encryption
With symmetric encryption, the same secret key is used to encrypt the raw file as is present in the base file. The file is then transmitted with this secret key during a transaction and decrypted again at the destination so that it can be read.
In the simplest version, this can be illustrated with a comparison of numbers and letters, as this comes closest to the principle.
For example, we can compare the files to be transferred with letters, which we want to transfer and hide by another encryption - in this case, numbers. The word "DOOR" would, therefore, if not encrypted, be readable in a precise way. However, symmetric encryption would assign a number to each letter. If we count up numbers comparatively from the alphabet, the word "DOOR" would be encrypted with the number "4-15-15-18". Since the target system can translate the sequence of numbers back into letters, but the intermediate fields of the network cannot do anything with the methodology, the file is protected. It is only recognized and deciphered at the destination.
But this is only an absolutely simple system. One can imagine that some algorithms are written in such a way that characters, letters, distances, and the like are included in the encryption. This makes the encryption much more effective. In this example, it is used to represent the symmetrical transmission of data over decryption to the destination.
2. + 3 Asymmetric encryption (including digital signatures)
Asymmetric encryption uses the method of different secret keys, the public, and private keys, to decrypt and encrypt data. The public key can be released without hesitation because, as the name suggests, it is a public key to which data or transactions can be made without releasing private information - the private key.
In the case of a transaction, the public key verifies that the private key belongs truthfully in the pair and that it is allowed to release the information to the desired recipients in the case of a fair request. When the public key signs a transaction it then allows it to arrive at the respective account in which both the public and private keys are assigned.
In all new cryptocurrencies, an extended variant of asymmetric encryption takes place almost exclusively. In the case of Bitcoin, this can be compared with the "secp26K1" method in the early days, which gave the only available method for extended, asymmetric decryption at the beginnings of Bitcoin keys.
4. Hash functions
The hash function (or hashcash function) is the fourth and last method and is used in connection with the Bitcoin protocol and the consensus called proof of work. This is used to verify transactions that are triggered in their integrity by the consensus mentioned, for example, the mining of Bitcoin by proof of work, which is then confirmed by the validator and then paid out. The function uses the SHA-256 cryptographic function.
What is the future of data encryption?
To protect against brute force attacks, data encryption must constantly evolve. It is important to improve not only the methods but also the area of application and handling. Systems are evolving, quantum computing is on the rise, and the current encryption will not be able to withstand it. Therefore, it is suspected that an exponential increase in research and development will go into the possibilities of expanding encryption.
IBM is currently working on confidential computing, quantum-safe cryptography, and fully homomorphic encryption. As a quick explanation: Homomorphic encryption permits users to perform computations on its encrypted data without first decrypting it. It is an addition in form of encryption without the necessity to the secret key information. It is in the same category as public keys cryptography.
In this context, the introduction and securing of keys and data via hardware-specific encryption is being tested on the basis of the company's own cloud with various options and tested for the hard case, so that encryption of the hardware used is secure and continues, despite growing technology, not to lead to a super disaster. The National Institute of Science and Technology (short NIST) is currently working on creating encryption algorithms that can stand against quantum computing.
Quantum computing itself is not yet a problem for cryptocurrency and permanently changing blockchains. The real threat to the encryption of blockchain and cryptocurrencies lies in the period after quantum computing is deployed, because the improvement of a new system will be significantly faster than computations ever seen before. This means that blockchain providers will have to think about not only current methods but also future-proofing encryption methods.
However, as the technology continues to grow in all directions, panic is unnecessary as research is already underway to improve systems, algorithmic calculations, and transaction encryption.