Where Does Cryptocurrency Users Use Their Public Key

Where does cryptocurrency users use their public key

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The field of cryptography is fundamental to many cryptocurrency systems such as Bitcoin. Cryptography is the practice of secure communication in the presence of third parties.

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In other words, cryptography allows for data to be stored and communicated in such a way that third parties are prevented from reading the contents of what has been communicated.

Cryptography is utilized in the creation of public and private keys to make cryptocurrency systems a secure network upon which users can safely operate.

The concept of ownership on a cryptocurrency system is primarily comprised of three interconnected elements:

  • Digital keys (Public key and Private key)
  • Cryptocurrency addresses
  • Digital signatures

The most important of these three elements are a user’s digital keys, because they allow for many of the ownership features that can be found in cryptographically secure cryptocurrency systems.

Where does cryptocurrency users use their public key

It is important to note that these digital keys are not stored on cryptocurrency networks themselves, and are instead, stored and created by cryptocurrency wallets, which exist independently of the network.

These keys are generated in pairs, consisting of a public key and a private key.

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The public key can be thought of as being an individual’s bank account, whilst the private key is the secret PIN to that bank account.

The public key is cryptographically connected to a cryptocurrency address in the sense that the address is a representation of the public key. It is often the case that the public key is used to generate an actual cryptocurrency address.

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This address serves as a user’s account identifier to which funds can be paid into.

Public Key

The important aspect to understand about the incorporation of public key cryptography in cryptocurrency systems such as Bitcoin, is that they are practically irreversible.

This means that the mathematical functions that constitute public key cryptography are relatively easy to calculate in one direction, and are practically impossible to calculate in the opposite direction.

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This cryptographic feature is at the heart of cryptocurrency systems, because it facilitates the creation of digital secrets and unforgeable digital signatures that are essential for ownership on these decentralized networks.

Cryptocurrencies such as Bitcoin utilize elliptic curve multiplication as the foundation for their cryptography.

Elliptic curve point multiplication is the operation of successively adding a point along an elliptic curve to itself repeatedly.

Where does cryptocurrency users use their public key

It is used in elliptic curve cryptography as a means of producing a one-way function, which is a function that is easy to compute in one direction, but difficult to do so in the opposite direction. In cryptocurrency systems such as Bitcoin, this one-way function takes the private key as an input to generate the public key, which is the output. Because of this, owners of a private key can confidently distribute their public key with the knowledge that no one will be able to reverse the function, and calculate the private key from the public key.

Cryptocurrency Addresses

A cryptocurrency address is simply a string of alphanumerical characters that a user can share with anyone that wants to send them money.

As mentioned before, a cryptocurrency address is effectively a representation of the public key. An address is derived from the public key through the use of a one-way cryptographic hash function. With Bitcoin, the algorithms that are used to make a bitcoin address from the public key are the Secure Hash Algorithm 256 (SHA-256) and the RACE Integrity Primitives Evaluation Message Digest 160 (RIPEMD-160).

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Beginning with the public key, this string of values is first ran through the SHA-256 hashing algorithm to produce a hash, and then that hash is computed using RIPEMD160 to produce a bitcoin address. The bitcoin address, and addresses in other cryptocurrency systems, are what often appears in a transaction between two parties, with the address signifying the recipient of the funds.

Private Keys

The private key consists of alphanumerical characters that give a user access and control over their funds to their corresponding cryptocurrency address.

Where does cryptocurrency users use their public key

The private key is used to sign transactions that allow the user to spend their funds. In other words, the private key creates unique digital signatures for every transaction that enable a user to spend their funds, by proving that the user does in fact have ownership of those funds.

For example:

When Bob decides to purchase a coffee from Alice’s store for 5 bitcoins, Bob presents his public key and digital signature (the private key is applied to the transaction to produce the unique digital signature) in order to spend those bitcoins.

Public Key

This signature can only be produced by someone with knowledge of the private key, which in this case is Bob. However, anyone with access to the public key and digital signature can use these two elements to verify that Bob does in fact exercise ownership over those 5 bitcoins.

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This is how everyone else on the Bitcoin network can verify and accept Bob’s transaction as valid, without needing to reveal Bob’s private key.

Digital Signatures

A digital signature is a mathematical scheme that is used for showing the authenticity of a digital message or document.

A digital signature that is valid will give the recipient of a digital message or document reason to believe that the message or document was in fact created by a known sender.

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A digital signature also indicates that the sender cannot in any way deny having sent the message or document, and that the message or document was not altered at any point while it was in transit.

Digital signatures play an important role in cryptocurrency systems, because they prove ownership of funds and allow the individual in control of those funds to spend them.

For example, the digital signature algorithm that is utilized in Bitcoin is known as the Elliptic Curve Digital Signature Algorithm, which is also known as ECDSA.

ECDSA is the algorithm that underpins the signature scheme in Bitcoin, and it is based on elliptic curve cryptography.

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This is the same cryptographic approach that is used in producing private and public key pairs. In Bitcoin, a digital signature is effectively intended to serve three distinct purposes:

  • Firstly, a digital signature serves as proof that the owner of a private key, who will by extension have ownership of his/her funds, has indeed authorized that those funds can be spent.
  • Secondly, a digital signature serves as proof that the authorization is undeniable.
  • Thirdly, a digital signature proves that the transaction that has been authorized by the signature has not or cannot be modified by anyone after it has been signed.

Digital Signatures in Bitcoin: How They Work

As mentioned before, a digital signature is a mathematical scheme, and this mathematical scheme consists of two parts.

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The first part is an algorithm that creates the signature. This signature is created using a private key (which is also known as the signing key) and the hash of the transaction that is to be signed. The second part of the mathematical scheme is an algorithm that allows anyone to verify that the digital signature that is produced is valid.

The first part of producing a digital signature in Bitcoin can be represented mathematically in the following way:
Sig = Fsig(Fhash(m),dA)

Where:

  • dA is the signing private key
  • m is the transaction
  • Fhash is the hashing function
  • Fsig is the signing algorithm
  • Sig is the resulting signature

The signing function (Fsig) produces a signature (Sig) that comprises of two values: R and S:

Once R and S have been calculated, they are serialized into a byte stream that is encoded using an international standard encoding scheme that is known as the Distinguished Encoding Rules (or DER).

In order to verify that the signature is valid, a signature verification algorithm is used. Verification of a digital signature requires the following:

  • Signature (R and S)
  • Transaction hash
  • The public key that corresponds to the private key that was used to create the signature

Verification of a signature effectively means that only the owner of the private key (that generated the public key) could have produced the signature on the transaction.

The signature verification algorithm will return ‘TRUE’ if the signature is indeed valid.

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Where does cryptocurrency users use their public key