One of the key purposes of cryptocurrency is to provide a peer-to-peer exchange of value without an intermediary such as a bank. But how can you trust a complete stranger to send money to the other side of the world?
It is for transactions to remain transparent and secure that so-called keys are used, they can be private or public. Both types of encryption keys perform different functions and remain an integral part of any cryptotransaction.
In this article, we will tell you everything you need to know about public and private keys and how they protect your funds from falling into the wrong hands.
Keys and cryptography
Before turning directly to encryption keys, we should focus on the cryptography that underlies both cryptocurrency and blockchain technology.
Cryptography is a method of encrypting information so that it can be sent and read securely only by the intended recipient. Such an encrypted message will look like garbled text, but anyone with the appropriate decryption key will be able to read it. Blockchain transactions are also encrypted and decrypted using a combination of public and private cryptographic keys.
Each new crypto wallet has a pair of cryptographically generated keys - one public and one private. Public keys can be securely transmitted to anyone who wants to send cryptocurrency to your wallet. Private keys, on the other hand, must be carefully protected because they give you full control over the funds associated with them.
Depending on the type of wallet you use, you may not interact with your private keys at all. But they will be involved in every cryptotransaction, whether you buy, sell, or exchange cryptocurrency, whether you know it or not.
Public and private keys
Private and public keys perform different functions, but they are all necessary to ensure secure cryptotransactions.
These keys usually look like long strings of alphanumeric characters cryptographically related - which means that any transaction encrypted with a public key can only be decrypted using the corresponding private key. This encryption method is called "asymmetric key cryptography".
What is a public key?
A public key, as the name implies, is available for others to see. It can be shared securely with anyone who wants to send you funds, whether in an email signature, on a website, or in a social media message.
The only thing someone can do with your public key is to send funds to your wallet and see its balance, so sharing a public key poses no security threat.
What is a private key?
Unlike public keys, your private key must never be shared with anyone, as it gives you access to the funds in your wallet.
For those users who want to keep their cryptocurrency as secure as possible, a good alternative is to use a self-storage wallet in which you have full control over your keys. Private key control is a controversial issue in the cryptocurrency world, and many believe that you have full control over your digital assets only if you are the sole owner of your private key.
In order to protect your private keys, you must back up your wallet and write down a recovery phrase (also called a seed phrase). This is the best way to protect your private key and keep your funds safe in case you lose access to your cryptocurrency.
The role of public and private keys in cryptotransactions
Regardless of what type of wallet you use or how you store your keys, all cryptotransactions must be "digitally signed" with a private key to complete.
Once initiated, your wallet creates a crypto-transaction containing, in addition to other data, the sender and recipient addresses, as well as the amount. The keys, on the other hand, will be used to create a digital signature confirming the legitimacy of the transaction. Once the signed transaction is sent to the network, blockchain nodes verify that the signature is valid and that there are enough funds at the sender's address to complete the transaction.
If you use custodial wallets, transactions are automatically signed whenever a request is made. Some cryptocurrency users prefer this option because using it does not require much responsibility, but it also means that the custodian service has the right to make transactions without your consent, limit access to your assets, or can even lose your funds in case of hacking, liquidation, or bankruptcy.
Therefore, many users interested in security prefer to take control and choose a self-storage wallet to be the only ones who have access to their private keys and therefore funds.
How can I protect my private keys?
If you use a custodial wallet, there is no foolproof way to protect your keys because you have no control over them. The only way out is to work with a company that you think you can trust. Choose responsibly and familiarize yourself with the reputation and business practices of a cryptocurrency exchange or cryptocurrency wallet provider before giving the organization access to your funds.
If you store the keys yourself, then the loss of the private key can make your funds irrecoverable. Therefore, you should remember the following rules for storing private keys:
- Never share your private keys with anyone other than trusted people;
- Use the recovery phrase to back up your private key. Share this phrase only with someone you trust to have access to your funds;
- Never take a screenshot of your private key/seed phrase;
- If you have a lot of cryptocurrency, store your keys offline, such as with hardware wallets that only connect to the Internet when signing transactions, or on a piece of paper that should be securely hidden.
Often, when using cryptocurrency, few people think about the importance of securing their funds. However, knowing how encryption keys work and following simple rules will help protect your digital assets and make them inaccessible to potential attackers.