South Africa is gaining global attention for how its embracing cryptocurrencies right now. While many central banks across Africa are instructing commercial banks to avoid processing crypto transactions, a boom in cypto activty is widely predicted for the rainbow nation.
As a result, many newcomers to cryptocurrencies will be keen to learn more about the techniques and technologies underlying these assets. Cryptography is one key study and practice that is essential to the success of cryptocurrencies, as the part-shared name suggests.
So what exactly is cryptography, and what makes it so important for cryptocurrencies?
What is cryptography?
Did you know the word crypto means ‘secret’ in Greek? It makes sense then, that cryptography, or ‘secret writing’, describes the field of sending private, encrypted messages or data between two or more parties.
In short, the process works like this. The sender encrypts the message to make it indecipherable to any prying third party. The nominated receiver then decrypts the message to make it readable again.
In more techy terms, this means using mathematics and computational power to turn plaintext into ciphertext, then turn ciphertext back into plaintext. This is done through encryption keys which execute the middle step of making a message or data unreadable for unauthorised readers.
What is cryptography used for in relation to cryptocurrencies?
Cryptography has many practical uses in the modern world, from maintaining military secrets to transmitting traditional financial data securely. Cryptocurrencies however are effectively founded on cryptographic ideas.
Bitcoin, the first and most valuable and commonly held cryptocurrency across the world, was created based on cryptographic methods, putting ‘crypto’ in the name.
Cryptography allows bitcoin and other blockchain-based cryptocurrency transactions to be anonymous, secure and ‘trustless’. Being trustless means you don’t need to know anything about the other party in a crypto transaction to transact with them safely – and you don’t need a third party like a bank or government to process it.
This allows end users to trade and manage their held cryptocurrencies securely through popular platforms such as MetaTrader4. Users are also protected from ‘double-spending’, which is the risk of a person falsely creating and sending multiple copies of their money.
Cryptography technology also controls the generation of new cryptocurrency units and verifies the transfer of digital assets and tokens.
In summary
This kind of technology is by no means easy to understand. In the case of cryptography, it’s not meant to be. But the bottom line is that cryptocurrencies rely on anonymity and encryption, which are enabled by cryptographic techniques.
Understanding these finer details isn’t essential for everyone who wants to invest in or trade cryptocurrencies. But a broader understanding may help South Africans feel more confident in embracing these new methods of exchange.