What Is Cryptography and How Does It Work?

By Caroline Banton · March 23, 2022 · 7 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

What Is Cryptography and How Does It Work?

Cryptography is a science that has evolved over time since the ancient Egyptians used it to communicate. Today, it takes many forms, with quantum computer scientists just one group who uses this coded system. Throughout history and into the digital age, the purpose of cryptography has remained the same: It is a means to transmit data in a secure form so that only the recipient can access the information.

Modern cryptography is front and center in advancements in computer science and cryptocurrency ecosystems. Sophisticated encryption algorithms protect data, but the threat levels continue to rise as quantum computers offer a new arsenal to adversaries.

In this article, we’ll explore how cryptography originated, how it has transformed over time, and how it is applied in the world of cryptocurrencies. We’ll delve deep into:

•   Cryptography Definition

•   The History of Cryptography

•   How Cryptography Works

•   Cryptography and Cryptocurrencies

•   Cryptographic Algorithms

•   Cryptography and Quantum Computing

Cryptography Definition

Cryptography is a way to transmit information and data so that only the intended recipient can access it. The message, content, or data is encrypted by the sender and then decrypted by the receiver using codes or other methods.

In computer science, the process of encryption typically takes plaintext, or unencrypted text, and scrambles it into ciphertext. In the context of cryptocurrency, the cryptography definition is the process by which digital assets are transacted and verified without a trusted third party.

Cryptography is the technology that underpins cryptocurrency protocols. One large appeal of cryptocurrencies, such as Bitcoin (BTC) and Ethereum (ETH), is that transactions are anonymous.They occur on a secure, decentralized, peer-to-peer network without the need for a central authority, like a bank or financial institution.

Bank transactions rely on certain protocols and policies to protect transactions and reduce fraud: the signature on a check issued by a bank must be verifiable and counterfeit-proof (not forged), and the signer cannot later go back on the commitment the check represents. Cryptocurrency transactions rely on different protective measures: Cryptography and encryption keys allow cryptocurrencies to be traded without real-world signatures.

The History of Cryptography

Cryptography, derived from the Greek words “kryptos” (meaning hidden) and “graphein” (meaning to write), existed long before the digital age. The history of cryptography dates back to the year 1900 BC, with cryptographic symbols appearing in hieroglyphics found in tombs in ancient Egypt.

Later, around 40 BC, Julius Caesar encrypted messages using a system that became known as “Caesar’s cipher”. He used letter substitution to scramble a message so that only the person who knew the secret could unscramble the letters and read the text.

Giovan Battista Bellaso created the first encryption in the 16th century. It was called the Vigenere cipher (falsely attributed to diplomat Blaise de Vigenere), and featured a grid with the alphabet written across 26 rows. The written encryption matched the length of the message, and Bellaso used the grid to create the code to encrypt the message, letter by letter. The sender shared the secret key word and the encrypted message with the recipient, who possessed the same grid and could decode the message.

Modern computers have made encryption commonplace and much more sophisticated, but the intention is the same: to ensure that only intended parties can access the information.

How Cryptography Works

While cryptography methods have evolved from ancient times, the art has always served the same purposes: confidentiality, integrity, non-repudiation, and authentication.

•   Confidentiality ensures that only the intended recipient can access the information.

•   Integrity ensures that the data cannot be altered in transit or storage without the change being detected.

•   Non-repudiation ensures that the intentions of the sender of the information cannot be denied later.

•   Authentication ensures that the sender and receiver can confirm each other’s identity and the origin and destination of the information.

There are three forms of cryptography, each with different levels of sophistication for data protection: hash functions, asymmetric encryption, and symmetric encryption.

Hash Functions

Hash functions secure information using algorithms. Instead of using traditional keys, this approach relies on algorithms to turn data into a fixed-length string of characters. Hash functions are one-way encryption because it’s impossible to decode a hash into its original data.

Blockchain technology uses hash to encrypt large quantities of information without compromising the original data. Hashes create organized, structured, encrypted data that act like digital fingerprints. Any unauthorized modifications that may occur during transport through networks can be verified, and changes to the original data result in a new hash. That new hash would not match the original source and would not be verifiable on the blockchain.

SHA-1 (Secure Hash Algorithm 1), SHA-2, and SHA-3 are cryptography examples of hash functions.

Asymmetric Encryption

Asymmetric encryption, also known as public-key encryption, uses a pair of keys. One key is a public key that can be exchanged with anybody over any network. This key shows how to encrypt the data and anyone can access it. The second key is a private key. The private key explains how to decrypt the message, but only the private key holder has access.

Both keys are generated by an algorithm composed of large prime numbers to create two unique keys that are linked mathematically. Anyone with access to the public key can encrypt a message, but only the private key holder can decode the message.

Rivest-Shamir-Adleman (RSA) is an example of public-key cryptography and is typically used for VPNs, email, web browsers, and chat.

Symmetric Encryption

Symmetric encryption — also called secret-key encryption — relies on a single key. For symmetric encryption, the sender and receiver of the data share the same key used both to encrypt and decrypt the information.

To encrypt data, the secret key is agreed upon in advance. Because there is only one key, and one less layer of security, this level of encryption is riskier than symmetric encryption.

Advanced Encryption Standard (AES) is a cryptography example of symmetric and single-key encryption. AES was established in November 2001 by the National Institute of Standards and Technology (NIST). It is a Federal Information Processing Standard (FIPS 197) for encryption in the private sector mandated by the U.S. government.

Cryptography and Cryptocurrencies

Cryptography is what makes cryptocurrency appealing. Crypto transactions are encrypted as they travel across a blockchain and are both secure and transparent.

Bitcoin creator Satoshi Nakamoto devised blockchain technology to solve the “double-spend” problem, where the same currency unit could potentially be spent twice, and a currency’s value as an online payment solution would therefore be extinguished. Bitcoin’s time-stamped, peer-to-peer distributed ledger is secured cryptographically to prevent double-spending.

This was the beginning of blockchain technology and the evolution of the different types of cryptocurrencies we see today.

Learn more about how cryptocurrency works with SoFi’s Crypto Guide for Beginners.

Cryptographic Algorithms

Cryptographic algorithms, also called ciphers, are used to code messages (like those from Julius Caesar and Giovan Battista Bellaso). Algorithms are derived from mathematical and rule-based calculations. The algorithms are used for keys, digital signing and verification, internet web browsing, confidential email, and secure credit transactions.

An algorithm or cipher suite (also known as a cryptosystem) uses one algorithm for encryption, a second for message authentication, and a third for key exchange.

Cryptography and Quantum Computing

Sophisticated algorithms are not impervious to hackers, and there is growing concern of the threat that quantum computing represents with powers to break current cryptography encryption standards.

The length of encryption keys is gradually increasing — as much as 256 bits (32 bytes) — and the algorithms are becoming more sophisticated in order to stop hackers from decoding them. But even the most complicated algorithms may be no match for quantum computers.

Quantum computing uses quantum bits (qubits) that can process an enormous number of potential results in parallel. These supercomputers can carry out integer factorization (breaking down large composite numbers into smaller numbers) at lightning speed, which is what makes current cryptographic algorithms so vulnerable.

The Future of Quantum Computers

Currently, the simple, small-scale quantum computers that have been created have had limited capabilities. But it may only be a matter of time before more powerful quantum computers are successfully developed.

Jason Soroko, CTO of PKI, Sectigo, explained it like this in an interview with EE Times : “A traditional binary computer solves that mathematical problem slowly, whereas a quantum computer with an efficient algorithm can solve that problem much more quickly. That efficient algorithm known as ‘Shor’s Algorithm’, when coupled with a quantum computer with enough stable qubits, will theoretically be able to break current cryptographic algorithms such as RSA and Elliptic Curve (ECC).”

Large-scale quantum computers are still a few years from existence, but the threat that these machines pose to symmetric algorithms like AES and asymmetric algorithms like RSA are real and causing NIST to seek more robust solutions.

The Takeaway

Cryptographic techniques are the cornerstone of the cryptocurrency market and the very reason market participation remains active. Encryption techniques ensure confidentiality, integrity, non-repudiation, and authentication — so that crypto transactions remain secure and anonymous.

Encryption techniques are growing ever-more sophisticated to combat cyber threats, and these threats are expected to intensify in the future with the development of quantum computers. However, focused scientific work is developing advanced algorithms to maintain protection even from the threat of quantum supercomputers.

If you’re ready to start buying and selling cryptocurrency, SoFi Invest® makes it easy, with more than two dozen coins to choose from, including Bitcoin, Chainlink, Ethereum, Dogecoin, Solana, Litecoin, Cardano, and Enjin Coin.

Find out how to get started with SoFi Invest.

FAQ

What is cryptography used for?

Cryptography is used for secure communications and as protection from adversarial third parties. In computer science, cryptography is a process of encryption using an algorithm and a key to transform an input (plaintext) into an encrypted output (ciphertext).

Cryptographic techniques allow cryptocurrencies to be traded anonymously. These techniques ensure confidentiality and that only the intended recipient can access information.They ensure integrity so that the data cannot be altered in transit and the intentions of the sender of the information cannot be denied later. Cryptography also allows the sender and receiver to confirm both each other’s identity and the origin and destination of the information.

How does cryptography relate to computer security?

Cryptography ensures secure computer networks and systems. The science of cryptography ensures the confidentiality of data, protects data from unauthorized modification during storage and transit, and allows data authentication.

How is cryptography used in the cryptocurrency space?

Three cryptography methods are used for cryptocurrencies: symmetric cryptography, asymmetric cryptography, and hashing. Symmetric cryptography uses a single key to encrypt the message at the source, transmit the encrypted message, and decrypt the message at the recipient’s destination. This method is simple to implement, but the shared key implies greater security risks.

Asymmetric cryptography uses two different keys — public and private — to encrypt and decrypt data. The public key — for example, the address of the receiver — is known openly, but the private key is known only to the receiver. The message can only be decrypted by the receiver’s private key. This method facilitates authentication and encryption for cryptocurrency transactions.

Hashing verifies the integrity of the data for network transactions by maintaining the structure of blockchain data. Hashes create organized, structured, encrypted data that resemble digital fingerprints. Any unauthorized modifications during transactions can be identified because they would create a new hash that would not match the original source and would not be verifiable on the blockchain.


Photo credit: iStock/MStudioImages

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
Third-Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
SOIN0122019

All your finances.
All in one app.

SoFi QR code, Download now, scan this with your phone’s camera

All your finances.
All in one app.

App Store rating

SoFi iOS App, Download on the App Store
SoFi Android App, Get it on Google Play

TLS 1.2 Encrypted
Equal Housing Lender