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1.3 How Does Cryptocurrency Work - New Background

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8 views10 pages

1.3 How Does Cryptocurrency Work - New Background

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donato.gionsoni
Copyright
© © All Rights Reserved
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How Does

Cryptocurrency Work?
Cryptography Hash Functions
● Hash is a mathematical function used in creating a digital fingerprint of data.

● A cryptographic hash function enhances the security of data.

● Hash functions are used in SSL internet connections, cryptocurrency, and password security.

● For example, Bitcoin uses the SHA-256 cryptographic hash function for verifying transaction integrity.

Properties of Hash Functions:


● Collision Free: No two input hashes should map to the same output hash.
● One Way: Given a hash output, it should be impossible to reconstruct the input.
SHA 256 Hash
● It is similar to fingerprints that act as unique IDs.
● It was first developed by the NSA in 2001 and is now widely used in cyber security.
● It is a 64 characters hexadecimal Hash ( 0,1,2,3,4,5,6,7,8,9, A, B, C, D, E,F).
Keys + Digital Signatures
● A digital signature is a mathematical technique used to validate
authenticity and establish:
○ Chain of origin
○ Integrity of electronic data such as documents
○ Informed consent by the signer

● Digital signatures are based on public-key cryptography (asymmetric


cryptography).

● RSA (Rivest, Shamir, and Adleman) algorithm allows for generating two keys
that are mathematically linked: one private and one public.
Keys + Digital Signatures
● Alice who is creating the digital signature uses their own private key along
with bob’s public key to encrypt the message.

● The only way Bob can decrypt that data is with his private key along with
the Alice’s public key.
Consensus Algorithms
● As the name suggests, “consensus” means agreement .

● Consensus Algorithms are protocols that every node in a blockchain network follow in order to reach a shared
agreement about the state of the network.

● The consensus protocol in the blockchain network solves mainly two challenges.
○ Attackers: The consensus algorithms has to prevent an attacker who tries to add a malicious block at the end
of the chain.

○ Competing Chains: In the blockchain network, each and every block is distributed across the network in the
world. There will be a situation when two miners mine the block at the same time.
Wallets
● Cryptocurrency wallets are software programs that allow users to interact with the blockchain by performing
operations such as sending and receiving transactions.

● Wallets store the public and private keys for the user and provide digital signatures under the hood.

● The receiver of the transaction must have a private key corresponding to the public key where the bitcoins were sent.

● When a bitcoin transaction takes place, there is only a transfer of ownership of the bitcoins.
Wallets & UTXO
Duration for the Course
Security Highly secure because of miners competing with each other
to add blocks to the blockchain

Accessibility No need of physical infrastructure like banks to provide


financial services to users in less developed areas

Reliability Trust is ensured using the consensus algorithm of the


cryptocurrency

Instant Settlement Transactions don’t have to go through a clearing house and


can be mined directly by miners round the clock

No Barrier to Entry No central authority to accept or reject users in the system

Fraud Reduction Only way to spend crypto is by using the private key of the
owner

Less Friction No tedious process like KYC, unlike banks.


THANKYOU!

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