Cryptocurrency wallets come with an automatically generated set of keys, one public and one private. Keys are created using cryptographic technologies, a method of encrypting and decrypting information underlying the mechanism of operation of cryptocurrencies and blockchain. Public and private keys are very different. What matters from a usability point of view is that both are required to complete each crypto transaction. How you interact with your public and private keys will vary depending on the type of wallet you use and whether you choose to self-care. One of the biggest differences between the two is security. Public keys can be safely shared with whoever you want, but private keys require careful storage. Otherwise, you risk losing all your funds. This means that if you take care of the security of your private keys yourself, it is important to have a plan to securely store these types of keys.
One of the main purposes of the existence of cryptocurrencies is to allow peer-to-peer exchange of value without an intermediary such as a bank. But how can you trust sending money to a complete stranger on the other side of the world without an intermediary to keep everyone honest? This is made possible by encrypted alphanumeric sequences called “keys”, which are the basis of the entire security mechanism for moving funds in the blockchain. There are two types of cryptographic keys, public and private. Both perform different basic functions, and all kinds of cryptocurrency transactions would be virtually impossible without their use. Next, we’ll delve into everything you need to know about public and private keys and how they protect your crypto assets from the wrong hands.
How keys and cryptography work
Before we get to the issue of public and private keys, let’s back up and talk about the cryptography that underpins both cryptocurrencies and blockchain technology itself. Cryptography is a method of encrypting and decrypting information so that information can only be securely transmitted and read by a specific recipient. A cryptographically encrypted message would appear as garbled text to anyone who is not authorized to read the message. However, anyone with the right decryption key would be able to read it. Blockchain transactions are encrypted and decrypted in a similar way through a combination of public and private cryptographic keys.
Each new crypto wallet without exception comes with a corresponding pair of cryptographically generated keys, one public and one private. Public keys can be securely shared with anyone who tries to send cryptocurrencies to your wallet address. On the other hand, private keys should be carefully protected as anyone who has the private keys to your wallet gains complete control over the funds associated with them. Depending on the type of wallet you use (trust or non-trust), you may never interact with your private keys. However, in any case, be sure that private keys are used whenever you buy, sell, exchange or spend cryptocurrencies, whether you are aware of it or not.
Public keys vs. private keys
Private keys and public keys perform completely different functions and both are necessary components to ensure the safe conduct of cryptographic transactions, including those related to cryptocurrencies. These keys are usually in the form of long strings of alphanumeric characters that are cryptographically linked, meaning that any transaction encrypted with a public key can only be decrypted with the corresponding private key. This encryption method is known as “asymmetric-key cryptography”.
What is a public key?
The public key, as the name suggests, is visible to others. You can think of it as a checking account. You can securely share your public key with anyone who tries to send you funds. The form in which you share your public key doesn’t matter and you can do it in the body of an email, on a website, or even in a social media post. The only thing another person will be able to do with your public key is to send funds to your wallet or see your wallet balance, so sharing this type of key is not a direct security risk to your funds. Public keys are actually mathematically generated from the corresponding private key. The important thing is that this process is not reversible.
What is a private key?
Unlike public keys, the basic rule is that your private key should never be shared with anyone, as any potential participant in the cryptocurrency market who has the wallet’s private key can access the funds contained therein. For more privacy-conscious cryptocurrency users, this reluctance to share private keys extends even to centralized exchanges, many of which provide security wallets that then manage private keys on behalf of users. A good alternative to trust services is to use a self-service wallet where you have full control of your private keys. Private key ownership is quite a controversial issue in the cryptocurrency sector, with many believing that you don’t really “own” your cryptocurrency unless you are the sole owner of your private key. This line of thinking has led to the saying “not your keys, not your crypto” popular among cryptocurrency enthusiast circles.
What is the role of public and private keys in crypto transactions?
The first and most important fact you need to be aware of is that no matter what type of wallet you use, all crypto transactions must be digitally “signed” with a private key to be completed.
When a transaction is initiated, your wallet constructs a transaction containing the address and amount (in addition to other metadata). The keys that belong to you are used to create a digital signature confirming the legality of the transaction. After sending the signed transaction to the network, the nodes verify the signature as well as whether the sender’s address has sufficient funds to successfully complete the transaction.
In the case of escrow wallets, the exchange or service provider holds your keys and automatically signs the transaction for you whenever asked by you. Some cryptocurrency users prefer this setup as it reduces their liability – regaining access to a lost account is as simple as clicking the “Forgot your password?” button. However, this also means that the custodian service may transact without your consent or restrict access to your assets, or even lose your funds due to hacks, liquidations or bankruptcy (Mt. Gox and FTX are examples of this).
How should I protect my private keys?
Whenever you use an escrow wallet service, there is no surefire way to protect your keys as you have no control over them. Just try to only work with companies you can trust. Do your homework and understand the reputation and business practices of your exchange or wallet provider before allowing an institution to hold your crypto holdings.
If you are self-sufficient in this regard, the loss of the private key may make it impossible to recover the funds. The best way to keep your private keys safe is to:
– Never share your private keys with anyone
– Use recovery phrase/seed phrase to back up the private key
Never take a screenshot of your private key/seedphrase or any other digital photo. If you have a large amount of cryptocurrency, it’s always best to keep your private keys offline. It is best if you use hardware wallets that connect to the Internet only to sign transactions. A much less technical but still very offline method is to simply write a recovery phrase on a piece of paper which you should then hide or keep under lock and key. In this case, make sure that no one else can find this data.