Public And Private Keys: What Are They And How Do They Work?

In this article I will explain why public and private keys play such a vital role in Bitcoin (and other crypto). In fact, they enable direct transactions without the need for intermediaries or third-party verification. These keys are an integral part of the public-key cryptography system.

Before going into the individual concepts of public and private keys, it is essential to discuss the fundamental concept of public key cryptography.

Public key cryptography, also known as asymmetric cryptography, is a cryptographic system that uses a pair of mathematically related keys to secure communications and ensure the confidentiality, integrity, and authenticity of data exchanged over untrusted networks such as the internet. It is widely used in various applications, like email, web browsing, digital signatures, and secure data transmission.

In public key cryptography, each participant generates a pair of keys: a public and a private key. The public key is made freely available to others, while the private key is kept secret and known only to the owner. The two keys are mathematically linked, but it is computationally impossible to derive the private key from the corresponding public key.

The public key is used for encryption and verifying digital signatures, while the private key is used for decryption and creating digital signatures. This duality allows for the secure exchange of information without the need to share the private key itself. It forms the basis of secure communication in a network where participants can trust each other's public keys but not their private keys.

The technology of public key cryptography (PKC) plays a vital role in securing and facilitating transactions in cryptocurrencies like Bitcoin or Ethereum. In fact, PKC is indispensable to the very foundation of cryptocurrencies, as it enables the encryption and decryption of transactions. Without the presence of PKC, the implementation of cryptocurrencies would be highly challenging, if not practically unfeasible.
Term Definition
🔒 Public Key A cryptographic key openly shared for encryption and verification of digital signatures.
🔐 Private Key A confidential key used for decryption and creating signatures, to be kept secret.
📝 Encryption The process of transforming data using a public key, ensuring it can only be decrypted with the corresponding private key.
🔍 Verification The process of confirming the authenticity and integrity of data or transactions using public keys.
🤝 Key Exchange The secure sharing or establishment of a shared secret key between two parties using public key cryptography.

Public Key Cryptography: An Example

Public Key Cryptography Example
Public Key Cryptography Example

To make the process easier to understand, let's consider a scenario where Alice wants to send an encrypted message to Bob using public key cryptography:

  1. Alice creates a key pair: a public key and a private key. He shares his public key with Bob or makes it available to anyone who wants to communicate securely with her.
  2. Bob obtains Alice's public key and uses it to encrypt the message he wants to send. The encryption process transforms the plaintext message into ciphertext, which is unintelligible to anyone without the corresponding private key.
  3. Bob sends the encrypted message to Alice over an untrusted network.
  4. Upon receiving the ciphertext, Alice uses her private key to decrypt it and recover the original plaintext message. The decryption process ensures that only Alice, as the possessor of the private key, can read the message.

Public Key

A public key is a crucial component of public key cryptography. It is a unique and openly accessible cryptographic key that is part of a key pair. Unlike the private key, which must remain confidential, the public key is meant to be shared with others. It serves as a recipient's address in cryptocurrency transactions or as a means to verify digital signatures.

With a public key, one can safely send data or funds to the corresponding private key holder without the need for a middleman or third party. The public key has an important role in ensuring secure and transparent communication in various cryptographic systems.

Private Key

A private key is the other super-important element of PKC, forming a key pair along with the public key. It is a confidential and securely stored cryptographic key known only to the key owner. Unlike the public key, which is shared with others, the private key must be kept secret to maintain the security of the system.

The private key is used for decrypting data encrypted with the corresponding public key and for creating digital signatures. It enables the key owner to access and control the resources associated with the public key, such as cryptocurrency funds or encrypted messages.

It is of utmost importance to safeguard the private key to prevent unauthorized access. If an unauthorized person gains access to the private key, they could potentially impersonate the key owner, decrypt confidential information, or gain control over sensitive assets.

Private and Public Keys in Cryptocurrencies

When it comes to Bitcoin and other cryptocurrencies, your private keys are securely stored within a cryptocurrency wallet. These wallets can take the form of software applications like Sparrow Wallet or specialized hardware devices such as the Trezor Model T. Importantly, your private keys are not stored on the cryptocurrency blockchain network itself.

If you choose to keep your cryptocurrency on an exchange such as Binance or Coinbase, the exchange serves as the custodian of your private keys. In this scenario, you place your trust in the exchange, similar to how you would trust a bank to safeguard your gold in their vault.

However, if you transfer your cryptocurrency to a non-custodial wallet, you regain control of your private keys. In this case, the configuration and functionality of cryptocurrency wallets typically handle the management of private keys automatically, reducing the need for you to directly interact with them. Instead, you are often provided with a seed phrase that acts as a backup and encodes your private keys.

By using the seed phrase, you can restore access to your private keys if needed. This approach offers convenience and security, ensuring that even if you don't directly handle the private keys, you still have the ability to control and protect your cryptocurrency assets.

How Public and Private Keys Work Together

Understanding the interaction between public and private keys is crucial for comprehending how cryptocurrency transactions operate. When you claim to be the owner of cryptocurrency, what you truly possess is a private key that serves as proof of ownership (means you can spend it).

This private key is stored on the blockchain, allowing anyone to verify your ownership by referencing your corresponding public key.

How a Private Key Is Created?

The generation of a private key typically occurs inside a user's wallet. Bitcoin or other crypto wallets employ an industry-standard method for generating private keys. The process begins with the wallet utilizing a secure random number generator to create a seed.

This seed serves as the base for deriving multiple private keys as required by the user. This approach offers a convenient backup solution for wallets since only one seed needs to be securely stored instead of individually safeguarding each distinct private key.

By using a secure random number generator and a seed-based derivation process, cryptocurrency wallets ensure the generation of private keys that are sufficiently random and resistant to predictability. This ensures the overall security of the cryptographic system and helps safeguard the user's assets and sensitive information associated with the private keys.

Signing A Bitcoin Transaction Using the Public and Private Keys

To perform a transaction on the blockchain, it is necessary to follow a signing process. Here are the steps involved when someone intends to send you a transaction:

  1. Encryption: The transaction is encrypted using your public key, making it accessible only through the corresponding private key. This encryption ensures the confidentiality of the transaction data.
  2. Signature: The encrypted transaction is then signed using your private key. This signature serves as proof that the transaction has not been tampered with during its journey. The digital signature is generated by combining the private key with the transaction data.
  3. Verification: The recipient of the transaction, along with the network nodes, can authenticate the transaction's authenticity using the associated public key. By verifying the digital signature against the public key, the network ensures that the transaction has been signed by the legitimate owner of the funds.

By digitally signing a transaction, you provide evidence of your ownership of the funds being transferred. The network's nodes automatically check and authenticate transactions.

Any transactions that fail to be authenticated are rejected by the network. Once a transaction is successfully authenticated and mined onto the blockchain, it becomes irreversible.

This signing process, coupled with verification by the network, guarantees the integrity and security of transactions on the blockchain, maintaining the trust and immutability of the decentralized system.

To prove ownership of a specific private key, it is not necessary to execute a transaction. Alternatively, you can achieve this by signing a message, a capability supported by the majority of software/hardware wallets.

Bottom Line

Understanding the meaning of public and private keys is quite important in the fields of cryptography, but also cryptocurrencies like Bitcoin. Public key cryptography forms the foundation of secure communication and transaction verification, allowing for confidentiality, integrity, and authenticity in data exchange.

Public keys serve as unique identifiers and can be shared openly to receive transactions or verify signatures. On the other hand, private keys must be kept confidential as they grant access and control over associated assets. With public and private keys working together, individuals can securely send and receive funds without the need for intermediaries.

The choice between managing one's own keys or trusting a custodian depends on personal preferences and risk tolerance. It is crucial to prioritize security when selecting custodial solutions and to safeguard private keys when managing them independently.

Frequently Asked Questions (FAQ)

What is the role of public keys in public key cryptography?

Public keys serve as unique identifiers and are used for encryption and verification of digital signatures. They can be openly shared to receive transactions and validate the authenticity of data.

Why is it crucial to keep private keys confidential?

Private keys grant access and control over associated assets. If private keys are compromised or accessed by unauthorized individuals, they can gain control over funds or confidential information. Therefore, keeping private keys confidential is essential for maintaining security.

What are the considerations when deciding between managing one's own keys or using a custodial solution?

The choice depends on personal preferences and risk tolerance. Managing one's own keys offers more control and security but requires a higher level of responsibility. Custodial solutions, like exchanges, provide convenience but rely on trusting a third party with the security of private keys. It is important to choose reputable custodians and prioritize security measures in both cases.