CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76.09% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

The vast majority of retail investor accounts lose money when trading CFDs.
76.09% of retail investor accounts lose money when trading CFDs with this provider.

What Is Cryptography?

Profile Picture
Author: Leon Marshall
Cryptography has existed ever since ancient times and it has evolved with the advance of technology. Nowadays, cryptography is used for everyday matters that involve security and confidentiality. It has become much more robust and safe over time due to its multi-layered structure. Two types of systems have made this possible until now – symmetric and asymmetric.

Cryptic messages have been around for centuries. After all, cryptography, which means hidden writing, is technically the study and practice of secure communication techniques. 

However, what do they really mean in today’s world of digital communication and economics? In order to understand cryptography, we should first clear up who it pertains to. In the past where technology was not around, when people of importance wanted to send a hidden message without anyone catching the meaning, what would they do? Sometimes, a messenger would be sent, dressed as a regular person, and would try to blend in as much as possible before reaching the targeted recipient (though this is closer to steganography because if found, the message could be read).

To further make matters confidential, the message would also be written in a way that only the recipient would be able to understand it (cryptography).

In other words, whenever the sender attempts to reach the recipient, they make its contents extremely complex. That way, any third party trying to grab the precious information would be unable to understand what’s hidden, except for the intended recipient who has the “key” – usually a string of characters. This can be in the form of text, image, audio, or even video. As long as the content cannot be cracked, the information is safe. This is fundamentally how cryptocurrency and other transactions work as well, though much more complex. 

Types of systems

Generally, there are two kinds of cryptosystems – symmetric and asymmetric. Symmetric systems have a single key to encrypt and decrypt information. Data manipulation is faster but less secure this way. 

Conversely, asymmetric systems require more time to source out the data, but they are also more secure. The reason for this is that there are two keys – a public key and a private key. Private keys are used to encrypt and decrypt the message, so they are known only by the sender and the recipient. Public keys, on the other hand, act like a cloak that allows the information to travel and be intercepted without running a high risk of being cracked.

Speaking of cracking a code, the code in this case refers to the use of code words where “Burn the City” could mean “Take the rubbish”.

Normally, for the sender and recipient to be on the same page, this require the use of a codebook where all the codes would be input. Cracking, on the other hand, is at the base of cryptanalysis – the study of methods for decrypting encrypted information without the required key.

A view of cryptography through the centuries

Although uncertain, the earliest potential form of ciphertext is said to come from Egypt around 1900 BC where non-standard hieroglyphs were carved into a wall of a tomb. Clay tablets from Mesopotamia dated a bit later, near 1500 BC, show a method meant to protect the recipe for pottery glaze that would have been considered commercially valuable at the time.

A number of different ancient cryptography examples include the Atbash cipher where the alphabet was simply reversed; one of the 64 arts in the Kamasutra from India; presumably Greece’s scytale transposition cipher utilized by the Spartans; the well-known Caesar cipher where a shift of a certain number of letters down the alphabet was performed, and others.

Most known cases of cryptography in the early times relied on the process of encryption alone. For that reason, attackers could decipher the message, provided that they were decently informed.

This continued until about the mid-15th century when the first combination of ciphers was used to hide various parts of a message. By way of frequency analysis, first discovered around the 8th century, most ciphertexts until then are thought to have been fairly vulnerable.

Modern-day cryptography

Computers came around in the early 20th century around that time linguistics gave way to mathematics in the field of cryptography. First, there were sequences, groups or blocks of binary code utilizing a 2-digit system of 0s and 1s. Then, with the advent of World War II and ciphers being used daily, the first decryption machine was constructed. However, the secret key was still unsecured – visible to the public – and that’s also partially considered one of the reasons why the British managed to overturn German forces by cracking the Enigma machine.

Symmetric systems remained the only ones until 1976, but they are still used today for basic encryption such as that of ATMs, e-mails, and secure remote access. Multiuser networks require complex key management schemes to have and keep each public key known only to sender and recipient – a downside fixed by the creation of a public key.

With public keys, a new level of ciphertext was reached and asymmetric systems became possible. Public-key cryptosystems take two keys – a public and a private key – that are mathematically related and pair them internally. The public key is freely distributed and used for encryption while the private key is kept secret and used for decryption. The two would usually communicate via a shared encryption key or hash functions (kinds of algorithms) and utilize certificates for authorization.

Cryptocurrencies and cryptography

Today, we know cryptography has various applications. Here are some examples of the most well-known products that rely on cryptography in our day-to-day life:

  • Chip-based payment cards
  • Computer passwords
  • Electronic commerce
  • Digital currencies

Regarding virtual currencies in particular, perhaps the most complex use of cryptography from the examples above, they rely on chaining together several components to keep data safe. Those are digital signatures of each asset that can be transferred, peer-to-peer networking to make communication between parties possible, and decentralization so that the process is delegated away from any central entities. 

Algorithms used by cryptocurrencies include asymmetric encryption and hashing. Through wallets, we have access to private keys that allows us to sign transactions on the network. Doing so, we leave a footprint of who transferred what amount of a cryptocurrency to whom that is made visible by the public key. Hashing is the second level of security on the blockchain and it comes in different forms – we know those as protocols. 

For instance, Bitcoin, Ethereum, Dogecoin, and other digital currencies utilize the proof-of-work protocol that requires the expending of energy to prove that a miner is trustworthy.

This happens by solving difficult calculations and playing a sort of “hashing lottery” so that whoever solves a block first receives the reward.

More energy-efficient options have come around that do not require as much energy, but instead function on the basis of taking a stake and being responsible for completing a block. Such are called proof-of-stake models and its most popular representative currently is Cardano. 

Other virtual currencies that rely on solar energy or completely decentralize themselves by relying on their community also exist.