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Cryptography in Blockchain

July 19, 2020

Blockchain technology is based on several main principles and cryptography is one of them. The other principle is the consensus algorithm. Both of these principles ensure the protection of the data transferred in the system and are used to prevent fraud and other manipulations with cryptocurrency and users’ information. Cryptography enables a safe two-way exchange where two participants can verify the information without involving the third party. Further, we will find out how the cryptography algorithm works in blockchain, review the types of cryptography and the consensus mechanism. 

How blockchain works

Blockchain is a decentralized system – the technology that lies behind the bitcoin network. In fact, it is a chain of blocks – the information in the blockchain is stored in the form of blocks that are located in the public database which is a chain. The procedures that are needed to add the new block to the chain are the following:

The blocks in the blockchain are the digital pieces of information. For instance, they store the data about time, date and the amount of cryptocurrency purchase, the participants of the transaction and hash code which is unique for each block. Every purchase is recorded with the digital signature made with cryptography. The digital signature is a means of security, along with the consensus algorithm.

  1. The transaction should be conducted.
  2. Verification of the transaction should be implemented.
  3. After the verification process, the transaction is stored in a block.
  4. Unique code or hash is given to the block.

If to compare the blockchain with the anatomy of a human’s body, then the blockchain technology is the skeleton for cryptocurrency and the cryptography is a nervous system. A digital signature is applied to authenticate and verify the transactions. The cryptographic signature is aimed to solve the following problems:

cryptography key
cryptography key
  • to prevent fraud;
  • to provide verification of the person’s identity;
  • no one can copy or forge the signature;
  • the signature can not be annulated.

What is cryptography

Cryptography is a tool that is targeted to protect the information in computer systems. The information is secured with the help of codes, so only the recipient is able to read it. 

Cryptography components include:

  • Payload or message. Also, it is called “plaintext”. This is the information that the sender and receiver are willing to keep confidential.
  • Secret key. The data needed to encrypt and decrypt the message.
  • Ciphertext or cipher. The encoded version of the information.
  • Encryption/Decryption algorithm. 

The cryptographic algorithm requires the message and the key to design an encrypted version of the message or the cipher. With the help of the key, the message is decrypted to the original version. 

Types of cryptography in blockchain

There are various types of cryptography for validation of the integrity of data in the blockchain.

Public key cryptography

Public key cryptography is the scheme of encryption that uses two types of keys – private and public. Each of the keys has its own unique purpose. The public key is used for encryption of the message and the private key is used for decryption.

It is impossible to compute the private key having the public key, that is why public keys can be freely shared to allow the users to encrypt the messages. On the opposite, private keys should be kept in a secret and be available only for the message recipients. The owners of the private keys are able to decrypt the message and create a cryptographic signature. 

Hash functions

The specific kind of cryptography used in the blockchain is called cryptographic hashing. The function turns data into the hash code. The code looks like a 32-character string of numbers and letters. The length of Bitcoin blockchain hashes is 64 characters or 256 bits. 

The encoded data created through cryptographic hashing can be shared with other recipients but it is mathematically impossible to decrypt it or analyze. Due to this reason, it is impractical to decode the original message used to design the hash code. 

With the help of cryptographic hashing both parties – the sender and the recipient of the message – can prove the data without the need to share the contents of the data. The validating of data is possible by checking if the hash codes match each other. 

Also, hash codes are used for detecting the changes in the characteristics of blockchains. If there are any changes in the original objects, it would be easy to define them because the new hash code would be generated. 

In the blockchain, the hash codes are chained – the combination of the data of one block is added to the hash code of the preceding block. The attempts to change or delete the data can be easily detected because any alteration makes the chain of hash codes invalid.

Merkle tree

The tree consists of the hashes of the data blocks. Merkle tree was named after the author of the term, Charles Merkle. It is a scheme where every node or leaf possesses a cryptographic hash of the data block and every non-leaf node is marked with a hash code in the labels of the child nodes. Hash trees are typically used to validate the data which is stored or transferred between the computers. Merkle trees can be applied to make sure that the blocks of the data have remained unchanged and undamaged and to check if the received blocks are not fake.

Merkle tree is the main component of blockchain that is the basis of its functionality. Merkle trees allow making validation of large structures of data secure and efficient. The main advantage of the application of the Merkle tree in the blockchain is the opportunity to scale and maintain the integrity of the data via the hash-based architecture. The most simple and common kind of Merkle tree is Binary Merkle Tree. Most hash trees are binary and have two child leaves under the node. However, some hash trees may have more child leaves under each node. 

Cryptology
Cryptology

Merkle trees in Bitcoin

In the blockchain, every block contains the hashes from the preceding block. In Bitcoin blockchain, the blocks contain the transactions and the header of the block. The header consists of preceding block hash, number of block version, timestamp, nonce, mining difficulty target and Merkle root hash. The hash tree use is very convenient because it provides the opportunity to check the transaction without downloading the whole blockchain.

Merkle trees in other blockchains

Bitcoin was the first blockchain where the Merkle tree principle was applied. In the other blockchains, there are similar Merkle trees or more complex ones. For instance, the implementation of the Merkle tree concept in the Ethereum blockchain is different. 

Due to the reason that the Ethereum blockchain is more complex, it applies the concept of a modified Merkle tree which is Merkle Patricia Tree. This type of hash tree implements the elements of Merkle tree and Patricia tree and includes specific optimizations required by Ethereum blockchain. Merkle Patricia Tree includes three different Merkle trees that are applied for three types of objects. 

Zero-knowledge proof protocol

Zero-knowledge proof in cryptography enables one to approve the contents of the message without conveying the information that is contained in the original version of the message. So, the facilitation process can be implemented without sharing any passwords or other confidential information. The zero-knowledge protocol is one more characteristic of blockchain as a decentralized system because the information received either from the sender or from the receiver cannot be revealed by any third party.

The zero-knowledge feature helps to make blockchain transactions secure and confidential. This concerns especially the transactions which involve cryptocurrency. Any third party does not have access to the data about the amount of money or the exact time when it was transferred. 

The example of the use of zero-knowledge proof is the crypto platform Zcash. The platform provides zk-SNARKs, the iteration of zero-knowledge proof protocol that makes it possible to verify the transactions due to consensus rules, while they remain fully encrypted. 

Cryptography ensures consensus

Before the blockchain network creates new blocks, it must achieve consensus. To arrive at a consensus, the blockchain users or the miners propose some blocks which are verified by network and then it chooses a block which becomes the next portion of the ledger. Sometimes the miners propose identical blocks that can be verified. Let us find out how the network chooses the next block that would be verified.

The mining computer has to guess the number which is called “nonce”. When the miners run the program that is guessing the correct nonce, the blockchain generates a random hash which is then defined as a solution to the problem. Each hash that was already defined, cannot be guessed one more time. The first mining computer who guesses the hash code is able to create the new block and after that, it receives the reward in the amount of 12.5 bitcoins or about $90,000. 

Handshake
Handshake

This algorithm prevents manipulations with blockchain by hackers. Due to the uniqueness of each nonce in the combination with the previous blockchain data which is verified results in the hash that is solvation. If the previous data is inaccurate or tampered, then the right hash will not be guessed. That is why blockchain is a more protected and secure system than any centralized authority like the bank. 

However, over years more and more people began mining bitcoins and using improved mining equipment. This resulted in the problem that now fewer people can mine bitcoins if they have average computers. The reason is that the average computers cannot now compete in guessing hashes with the computers that are specially designed for mining bitcoins. So, anyone who has a more powerful computer can mine the large number of remaining bitcoins. This situation creates some resemblance of centralization that does not coincide with the main principles and philosophy of the technology application.

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