Key Takeaways:
- Bitcoin uses cryptography through algorithms to sign transactions and secure the blockchain
- Bitcoin uses various cryptographic methods, such as public and private keys, digital signatures, and hash functions
- Cryptography is a crucial aspect of Bitcoin and other cryptocurrencies, allowing for secure and decentralized peer-to-peer transactions
Is Bitcoin Encrypted? What Cryptography Bitcoin Uses?
Although Bitcoin itself is not encrypted, it uses some cryptographic methods to sign transactions, secure the blockchain and prevent double-spending.
No one could look into the code if Bitcoin would be encrypted, which would contradict the open-source nature of this distributed ledger.
Cryptography is the study regarding the protection of information through the use of a code system so others cannot replicate the actual information. Algorithms, a concept in mathematics, are the basis of cryptography.
Only the recipient can process this information with an ‘unlock key’. Bitcoin is not the only technology using cryptography today. There are many other electronic systems which are secured through passwords or two-factor-authentication.
Other cryptocurrencies like Ethereum use these methods as well. The key aspects of cryptography are:
- The included information should be hidden from everyone who is not intended to get it
- The information should not be possible to be altered
- The sender and the recipient should be able to authenticate the information
What Kind of Cryptography Does Bitcoin Use?
Cryptography has different methods, like encryption or decryption, digital signatures, or hash functions.
Bitcoin is called a cryptocurrency, or crypto because it uses some of these methods. There are even advanced methods used like zero-knowledge proof, multiparty computation or schnorr signatures.
Encryption and Decryption
This is the most basic concept of cryptography.
- Encryption is transforming readable data to unreadable data
- Decryption reverses this process, showing the original data
Bitcoin itself is not encrypted. But wallet providers use it to secure their crypto wallets. The most known example of it is the seed phrase and private keys used to access a wallet.
Bitcoin transactions need private keys and store them in their wallet. This private key gives access to your digital assets, so data security should be your top priority. If the wallet owner wants to access the data in the wallet, he needs to decrypt it.
This can be done with a ‘decryption key’ which is a password or the 12- to 24-word seed phrase. This type of cryptography is called ‘symmetric encryption’. The Bitcoin protocol, however, uses the concept of asymmetric encryption.
It uses a private key, which is needed to access the Bitcoin in the wallet, but it also uses a public key. So what exactly are private and public keys?
Public and Private Key
The private key provides access to the bitcoins in a Bitcoin wallet.
Besides it, there is also a public key needed for the transactions process.
Both keys derive from a known concept of cryptography, called ‘Public key cryptography‘. The problem with encrypting and decrypting data is that the recipient needs a key to decrypt data.
So he has to get this key from the recipient besides the data. This leads to another security problem. How can they transmit it, allowing everyone to decrypt the data? Public key cryptography solves this problem. This method uses two keys instead of one.
- A private key is a unique number only you know to send Bitcoin
- A private key generates the public key to receive Bitcoin
The public key encrypts messages and a private key decrypts it. The public key is public and anyone can use it. A person with the private key can decrypt an encrypted message with the public key.
This way, there is no need for a private key to be sent separately. The private key allows the Bitcoin user to verify that he is the actual owner of the Bitcoin because only he can decrypt the data with it.
Transactions use the public key in their process. So both keys act similar to a bank account number and a password, allowing peer-to-peer transactions without intermediaries. But other than a general password, you cannot recover or change a private key.
Digital Signatures
Public key cryptography can also digitally sign data.
The algorithm uses the same mathematical model as the encryption based on elliptic curves, known as ECDSA (Elliptic curve digital secure algorithms).
It works the same way as a handwritten signing, but is more secure and nearly impossible to counterfeit. For each data, a unique private key is generated and cannot be copied.
If you want to send Bitcoin to someone, you need to sign the transactions using your private key, which encrypts the transaction data and proves its authenticity. Anyone can verify it by using the public key.
The concept of public and private keys and digital signatures is called ‘asymmetric encryption’. In comparison with symmetric encryption, which only uses one key, asymmetric encryption uses key pairs.
There are different types of encryption based on these mechanisms. The most known are the ECDSA, RSA (Rivest-Shamir-Adleman), or DSA (Digital signature algorithm).
Hash Functions
A Hash function is a mathematical function that takes any input no matter the size and produces an output with a fixed length.
They are the third method used in cryptography.
This function can bring an advantage to the prior methods, where data can sometimes be big and slow. They can produce an output, which always has the same amount of bits, ensuring fast data transfer and encryptions.
The output generated by this function is called a ‘hash’, which is a string of numbers and letters in hexadecimal notation. One of the most known ones is the SHA-256. This is the fixed length of the hash produced by the function.
Hashing differs from encryption, because it is nearly impossible to decrypt. The output is always extremely different, even if the input is just changed slightly. There is no way to reverse a hash back to its function.
This ensures that no one can hack the hash and enables Bitcoin to give a top security for its network. The fixed output length further ensures that the Bitcoin network can run fast.
How Does Bitcoin Encryption Work?
The Bitcoin mining process uses encryption algorithms to prove authenticity and increase the level of security.
The Bitcoin mining process creates a new block of transactions.
It bundles the new transactions on the blockchain into a block worth of 1 MB. These blocks need to be constructed by the miners.
Inside each block, there needs to be some specific data included. It puts the transaction data together with the block header.
The block header contains information about which acts as input for the hash function:
- the hash of the previous block
- the hash of the merkle root
- the nonce and
- the target hash
The hash of the previous block is put through the SHA-256 twice. The reason for this double hashing is to minimize the possibility that it generates the same hash twice.
Then the miner has to combine this input with a parameter called ‘nonce‘ (number used only once) to find the target hash. The nonce is a variable that the miner has to find. He tries billions of variables to find the target hash until the Bitcoin network verifies it.
After the validation, a new block is created and added to the blockchain. The new block in the blockchain is now hashed with a unique variable that is not interchangeable. The result is called the ‘proof-of-work’.
How Does Bitcoin Public-Key Cryptography Work?
Using public key cryptography in Bitcoin is an important part of the transaction process.
Digital signatures provide proof of ownership.
They comprise the data needing a signing, the public key and the signature itself. The data to be signed can be everything from a simple text to video or audio files. The public key is the identity of the signer who has signed the data with his private key.
A signature results from this process providing a proof that the signer has signed this data. The advantage of this method is that everyone can verify that the signature is authentic. Only the public key, the signature and the data are needed.
And since it is public, it is available to anyone. The digital signature algorithm used for Bitcoin is the ECDSA. This algorithm allows creating a public key to sign data from a private key. The process of encryption uses algorithms to create random strings.
It is a 256-bit hexadecimal number. It would look something like this:
036ff283158711436176
A variable then multiplies this private key to create a corresponding public key. It is not possible to derive the private key back from it.
A user is signing data with its private key, but to leave it secret, it generates a corresponding public key from the private key to actually sign the data.
The public key can provide the authenticity of the signature made with the private key because it derives from it. It can further be used to create wallet addresses.
Are Bitcoin Transactions Encrypted?
Bitcoin transactions use stored information as signatures and wallet addresses which are encrypted.
A transaction itself is not encrypted because it needs to be accessible publicly.
The blockchain stores every transaction and everyone can see the transaction with information on what amount of bitcoin was sent and which wallet addresses it affected in this transaction.
So if the transactions are visible to anyone, the question arises if someone can trace transactions. Every transaction can be traced as well as every bitcoin until its creation. This ensures that the ownership of this digital currency can be verified.
In the traditional banking system, you can see only your transactions within your online banking. Only the bank itself can see all transactions because they need to control and verify it. In the blockchain, you can see all transactions from all users.
A new future of Bitcoin, Liquid network, even introduced a so called sidechain to the Bitcoin network. It enables Bitcoin to be transferred on another blockchain for faster and even more secure transactions.
Can Bitcoin Be Decrypted?
No, Bitcoin cannot be decrypted with the technology available today.
With all the cryptography used in Bitcoin, it is extremely secure.
Basically, the SHA-256 cannot be decrypted because of its one-way nature. To further minimize the risk of randomly picking the same output, hashing processes are doubled. We cannot break Bitcoin encryption with our current technologies.
We can still not hack Bitcoin because the algorithms used in the Bitcoin network are too advanced. A hacker would need to have much more computing power than the entire network comprising thousands of miners and users.
FAQ
Is Bitcoin Actually Private?
Bitcoin is actually private.
All information regarding the network is public, but personal details from the users are not shared because they aren’t needed to use Bitcoin.
The blockchain needs to be public so it can act as a decentralized ledger. With public access, everyone can verify its authenticity, making it harder for hackers to scam the system. We need no personal details to use Bitcoin and we can stay anonymous.
Theoretically, a user can be traced through the connection of his IP address and the transactions data, which is often named as ‘pseudonymous’. They trust the system itself through cryptography.
How Long Does It Take to Decrypt Bitcoin?
There is an estimation from the University of Sussex that quantum computers could be able to decrypt Bitcoin.
They would need approx. 1.9 billion qubits to crack Bitcoins encryption within 10 minutes.
But until this technology will get developed further, it will take a decade or more. In the meantime, we could update Bitcoin with more secure encryption methods and hashing algorithms, making the time needed to crack it even longer.
Until then, the current security measures make Bitcoin safe.
Does Bitcoin Use RSA Encryption?
RSA is one of the most commonly used encryption, but Bitcoin doesn’t use RSA encryption.
Bitcoin uses ECDSA with the secp256k1 curve to store the data associated with each transaction on the Bitcoin network.
Besides it, Bitcoin relies on another cryptography mechanism, hash functions. SHA-256 is considered being much more secure than RSA encryption, as it takes a much longer time to crack, increasing Bitcoin security.
How is SHA-256 Used in Bitcoin?
SHA-256 is used for the creation of Bitcoin addresses and within the Bitcoin mining process.
SHA-256 stands for ‘Secure Hashing Algorithm 265’ with 256 bits.
SHA-256 works by taking a message of any length as input, then producing a fixed 256-bit output known as a hash. It acts as a digital fingerprint that can be compared with the original message to verify its integrity.
Conclusion: Bitcoin Itself is Not Encrypted
Bitcoin uses cryptography to secure its transactions and the blockchain.
Although Bitcoin itself is not encrypted, wallet providers use encryption to secure their crypto wallets through a seed phrase and private keys.
The concept of public and private keys, digital signatures, and hash functions, all of which are types of cryptography, are used to ensure data security and integrity.
With the use of these methods, Bitcoin enables peer-to-peer transactions without intermediaries, providing a decentralized network that is transparent and immutable.
