A Bitcoin wallet is beyond just an address. Every Bitcoin address will be assigned both a private and public key. A public key is used to send Bitcoins to your Bitcoin address, verify your signature in the transaction to ensure everything is in order, authenticate, and finalize the transaction.
On the other hand, a private key is a secret string that allows individuals to unlock and spend your Bitcoins for purchases. This is done by signing transactions which tell the Bitcoin network that you were the authorized owner of the address in which the Bitcoins are held and that the transactions are valid. The only way to create a valid signature is by using the correct private key.
Faking a transaction signature is impossible, thus ensuring total security. Your Bitcoin wallet will help keep a record of all of the incoming and outgoing transactions. Each of these transactions links to your wallet which will be stored for future reference. Whoever holds the private key can spend the Bitcoin belonging to an address, so your private key is essentially the key to the safe holding your Bitcoins. To verify you were the owner of your Bitcoin address, you can use your private key to sign the message. All of these processes are secure in mathematics using asymmetric cryptography.
Encryption is the process of taking a message and scrambling its contents so that only certain people can look at your message. There is two types of encryption, symmetric and asymmetric encryption. Let’s first take a look at symmetric encryption to understand why asymmetrical encryption to understand why asymmetric encryption was created. To do that, let me introduce you to Alice and Bob.
Alice has a sensitive document that she wants to share with Bob. She uses an encryption program to protect her document with a password or passphrase that she chooses. She then sends the encrypted document to Bob. However, Bob cannot open this message because he doesn’t know the passphrase that Alice used to encrypt the document.
In other words: he doesn’t have the key to open the lock.
Now comes a real problem: how does Alice share this passphrase securely with Bob? Sending it through email is risky because others might find the passphrase and use it decrypt any message between Alice and Bob.
This is exactly the kind of problem that asymmetric encryption intends to solve. It is comparable to a mailbox on the street. The mailbox is exposed to anyone who knows it’s location. We can say that the location of the mailbox is completely public. Anyone who knows the address can go to the mailbox and drop in a letter. However, the only of the mailbox has a key to open it up and read the messages.
Let’s go back to the technical details.
When using asymmetric encryption, both Alice and Bob have to generate a key pair on their computers. A popular and secure way of doing this is by using the RSA algorithm. This algorithm will generate a public and private key that are mathematically linked to each other.
Public keys can be used to encrypt data and only the matching private key can be used to decrypt it. Even though the keys are linked together, they cannot be derived from each other.
In other words: if you know someone’s public key, you cannot derive his private key.
If we retake our mailbox example, then the mailbox’s address would be the public key. Something that everyone is allowed to know. The owner of the mailbox is the only one who has the private key and that is needed to open up the mailbox.
Let’s now take a look at how Alice and Bob can use asymmetric encryption to communicate securely with each other. They start by exchanging their public keys. Bob gives his public key to Alice, and Alice gives her public key to Bob.
Now Alice can send her sensitive document again. She takes the document and encrypts it with Bob’s public key. She then sends the file to Bob, who uses his private key to unlock the document and read it. Because they use asymmetric encryption, only Bob is able to decrypt the message. Not even Alice can decrypt it because she doesn’t have Bob’s private key.
The strength and security of the asymmetric encryption now rely on Alice and Bob to keep their private keys well protected. If an attacker steals Alice’s private key, it can be used to decrypt all messages that are intended for Alice.
However, the attacker cannot decrypt messages that were sent by Alice because that requires Bob’s private key.
Asymmetric encryption is used in a lot of places where security really matters. You might not be aware of it, but every time you visit a secure website via HTTPS, you’re actually using asymmetric encryption. It’s also being used to securely send emails with the PGP protocol and of course: Bitcoin also uses asymmetric encryption to make sure that only the owner of a money wallet can withdraw or transfer money from it.
So now you know how asymmetric encryption works and what the differences are between asymmetric and symmetric encryption. We use encryption on virtually every aspect of our platform and even take further precautions to ensure safety and security.