An Introduction to Digital Assets
Anyone reading this has probably heard of Bitcoin.
In simple terms, Bitcoin is the first in a long list of digital currencies that are built for sending and accepting funds without any intermediaries. This is done without the need to disclose identity or authorize transactions by a central authority, such as banks or a country’s government.
The power to use digital currencies comes from a public distributed network structure called a “blockchain”. Blockchains are a public registry that uses the computing power of the miners participating in the network to secure and validate it instead of connecting to a central administrative system.
The Technical Basics of Crypto
From a technical perspective, there are several interesting aspects that constitute a blockchain – distributed databases and a consensus of all participants. However, the central foundation of information chains is cryptography. Without cryptography, it would be impossible to encrypt data, secure communications or confirm browsing a website safely.
Cryptography is the science that deals with the study of codes — writing, solving and manipulating them. Cryptography has existed for thousands of years and helped to write the information in a message in secret to keep it secret from third parties who received it unintentionally.
Cryptography and computers have had a competitive relationship since the beginning of digital projects. During World War II, the United Kingdom invested heavily in deciphering Axis communications. As deciphering codes became more difficult, a superpower race began to develop a machine capable of deciphering codes faster than human thought. This led to the development of the first programmable digital computer named “Colossus”.
What Are Public and Private Keys?
Private keys are a vital component in the system of this digital currency, as they are the mechanism by which you can prove that you are the owner of the Bitcoin units. By using them, users authorize their ownership of funds and transactions in a public blockchain network. Private keys exist in many forms and are the way to send encrypted messages.
For each private key that exists in the network, there is a matching public key. As the names suggest, a private key must not be shared with anyone! But a public key, in contrast to a private key, can be shared with anyone, as there is absolutely no danger of being hacked or having your funds stolen.
The difference between public and private keys could be compared to the difference between a username and a password. Unfortunately, unlike a regular password, a private key cannot be recovered if lost. So, private keys are extremely important and must be protected.
In Bitcoin, private keys produce public keys through an algorithm called ‘ECDSA’ (Elliptical Curve Digital Signature Algorithm). A private key is an input to an algorithm that will always produce a corresponding public key. However, a public key cannot reverse engineer, or more precisely produce a private key, due to the nature of this algorithm.
Security Through Big Numbers
A private key in the Bitcoin network is a code of 256 characters, which can be represented in several forms. These private and public key pairs are the engine of the address system in the Bitcoin network. A new address can be generated programmatically. When initiating the process of requesting a new address, any interface the user prefers can be used, like a bitcoin wallet.
And it is virtually impossible to guess private keys. Cryptography achieves security through very large numbers. Attackers could try to guess private keys for millions of years, using every practice known to mankind, and it still wouldn’t be possible.
This is perfect because it allows all kinds of applications to be created through Bitcoin — for example, the company Decent created a prototype platform through which funds could be donated to various causes using digital currencies. It is not necessary to place a limit regarding the number of campaigns that can be created, or to limit the number of deposit addresses that a user can have, because there is an infinite number of addresses that can be generated.
In Bitcoin, the pair of a private key and a public key is the foundation of each account and has many uses. In this context, they are used to confirm the ownership of digital currency units and to have diversity in the generation of addresses.
What is a blockchain?
Today’s blockchain industry began with Bitcoin, but the roots of contemporary blockchains can be traced back to the early 1980s.
In short, blockchain is a decentralized database. Traditional systems typically deal with a centralized database, but in the case of blockchain, the database is distributed. This design means each node in the network can be run by anyone and has a copy of the entire network’s data. So, any intermediary is eliminated and the need for a central authority is no longer present.
How does a blockchain work?
A blockchain is a digital ledger that contains data such as transactions made in the network between its participants. This data is ‘packaged’ into blocks, then verified by network operators (nodes and miners in the case of Proof of Work; validators in the case of Proof of Stake) and if found valid are accepted as part of the existing blockchain through a consensus algorithm (PoW, PoS etc). Each block contains a unique signature of the previous block (a kind of ‘fingerprint’) and the blocks are linked together by this, hence the term blockchain, not chain-of-data-blocks.
Blockchains also usually also contain a reward system – a way that encourages the actors of the network to be honest and respect the rules of the code by which the network is guided. An efficiently functioning public blockchain has as its components a community of users, nodes, developers and miners. They all have an important role in the development and success of the network.
There are numerous types of blockchain, each trying to have a specific utility. Bitcoin and Ethereum are the most popular public, open-source blockchains. Anyone can use them and build various applications on them. At the opposite pole are private blockchains, which limit the number of participants and are closed systems. As a rule, they are preferred by companies to be able to carry out their internal operations in a more efficient way.
Key Features of a Blockchain
Blockchains are based on a decentralized network of participants and not a central authority. This makes transactions on the network constant, fast, secure, cheap and tamper-proof. Here are some key features of all public blockchains
- Constant — networks operate globally 24/7/365;
- Fast — transactions are peer-to-peer and are carried out between users without the need for intermediaries;
- Secure — nodes operate in a decentralized manner and thus provide collective security against cyber attacks;
- Inexpensive — since middlemen are removed, blockchains operate at low cost;
- Inviolable — data is transparent (public) and immutable; once transactions are put into a block, and it is added to the blockchain, no one can alter the data;