Dubai: If you’re new to cryptocurrencies, you may have had your doubts when stashing a small portion of your savings in an investment that isn’t tangible or physically visible. But knowing how your crypto transactions are kept safe from fraudsters can help influence your investment decisions.
“The internet has created a digital economy in which countless transactions, or simple transmissions of data from one party to another, take place every day. Cryptography is a natural fit in building a digital currency,” explained Brian Deshell, a UAE-based cryptocurrency trader and analyst.
“Different cryptocurrencies use different configurations of encryption methods to achieve their stated purpose, which is to grant various levels of transaction and user anonymity. Cryptography is the science of hiding information in plain sight, in order to conceal it from unauthorised access.”
For an online portal to be secure all of the data transmitted between the computers where the data is kept and where it is received must be encrypted. Due to the large number of transactions on the internet, cryptography is what encrypts and ensures the security of your transactions.
How cryptography secures crypto transactions
In recent years, digital transactions are made secure with the technology of ‘blockchain’, i.e. a highly-cryptic digital ledger of transactions. It is also the central technology behind digital assets like cryptocurrencies, but what makes this work is its cryptic nature, which comes from cryptography.
“Cryptography allows you to have confidence in your electronic transactions involving your digital currencies. This is integral to getting your money back on time, an overcast to any investment you make,” said Brody Dunn, a UAE-based investment advisor at a wealth management firm.
“This is the primary reason why encryption is used in electronic transactions to protect data such as account numbers and transaction amounts, digital signatures replace handwritten signatures or credit card authorizations, and public-key encryption provides confidentiality.”
Cryptography lowers cost of having middle-men
So, cryptography essentially helps keep information regarding a transaction secure, and since a blockchain is distributed to all users of a cryptocurrency, information regarding transactions is essentially tamper-proof.
Additionally, using cryptography allows for transactions without the need for an intermediary, like a bank, broker or any financial institution, reduces transaction costs, meaning it enables you to go ahead and directly make a transaction by yourself without shelling out much money to middle-men.
“Without cryptography, hackers can easily access your brokerage accounts and steal money. But with time stamping, a cryptographic technique that can certify that a certain electronic transmission was delivered at a particular time, it gets very hard for hackers to tap into,” added Dunn.
Drawbacks to use of cryptography in e-currency
In general, cryptography is an important way of achieving data confidentiality, user authentication and ‘non-repudiation’. However, there are some costly drawbacks to using cryptography to encrypt cryptocurrency transactions.
In order to keep digital currencies secure, cryptocurrency users are also asked to use a personalised crypto wallet with a ‘private security key’, a secret number used to send encrypted messages using cryptography. However, losing the key to your wallet could mean losing funds, warned Deshell.
“As cryptography is a complex computing function, encrypting large amounts of data about transactions requires a lot of electricity. This is why ‘Quantum’ computing - which is far more powerful than more traditional computing -- is being developed for commercial use,” added Deshell.
“‘Quantum’ computing may eventually be required to break the current encryption methods used in cryptocurrencies, and this may not only deem traditional cryptographic transactions as defunct, it will raise the cost of transacting cryptocurrencies in the future.”
As the amount of information and communication expands exponentially in the digital world, according to industry experts, cryptography is an important underlying field of study keeping it all safe. But how useful are they when buying or selling cryptocurrencies?
“Apart from securing the communication in the presence of third parties, cryptography has many applications in end-to-end encryption of digital currencies, which is the primary reason why a non-tangible investment asset is kept secure,” added Dunn.
“As this crypto science has proven its use cases, there are also ways to invest in its development beyond cryptocurrencies, as more and more businesses in recent years are making use of the technology to keep their various assets and day-to-day operations secure.”
So, instead of only chasing cryptocurrencies to reap the financial benefits of this credible science, Dunn advised how investors can stand to benefit by investing in companies that use such technologies to build financial products and services.