Public and Private Keys in the Crypto and DeFi World

Public and Private Keys in the Crypto and DeFi World

Keeping your funds safe is crucial, regardless of your choice of currency or platform. In the cryptocurrency world, investors use wallets to store and manage their tokens, though they might not be what you imagine when you first hear the word.

The wallet in the crypto space is defined as an address that is made up of random letters and digits. Each crypto wallet has both a public and a private key to identify it. The public key is the wallet address anyone can use to submit transactions involving you.

On the other hand, the private key acts as a digital signature used to authenticate the money in your possession inside your wallet. It’s also needed to unlock and verify transactions on your end and show you the cryptocurrency that you received.

Want to learn more about keeping your crypto investments and earnings safe? This guide will introduce you to proper security measures and tips on how to protect your crypto portfolio. Let’s get started!

What Is DeFi, and How Is It Related to Crypto?

Though blockchains had their humble beginnings as digital ledgers only (Bitcoin being the most notable example), a new generation of crypto networks aims to achieve more than that. Starting with Ethereum, newer blockchains make use of smart contracts to expand their capabilities.

Smart contracts operate above the blockchain foundation layer, transforming a blockchain network from a basic record of digital transactions to a general computational platform where decentralised applications (dApps) may be stored and used.

In other words, newer networks can host a variety of programs fulfilling different functions, forming a rich decentralised ecosystem. This combination of alternative financial solutions running on blockchains is known as ‘decentralised finance,’ or DeFi for short.

New sorts of financial assets, trade, and business models are emerging thanks to the rise of decentralised finance (DeFi) applications. The use of blockchain technology to disrupt established financial services and institutions by making financial payments, procedures, and systems simpler, quicker, and more efficient is also part of crypto finance.

Some examples of DeFi include cryptocurrencies themselves, but also networks such as 1inch and SushiSwap, which are a decentralised alternative to traditional crypto exchanges.

The Characteristics of Smart Contracts

While these characteristics may restrict the applicability of smart contracts, they are directly tied to their potential.

Smart contract design aims to reduce transaction costs by eliminating deliberate and inadvertent violations of contractual commitments. In addition, they also eliminate the requirement for trusted intermediaries to verify and enforce contractual performance.

This means that in the digital world, there is a higher capacity for contraction. In layman’s terms, DeFi transactions occur more quickly and efficiently. They are executed almost instantaneously, usually through the use of peer-to-peer technology or liquidity pools.

As smart contracts become more commonly utilised to conduct business, problems will inevitably emerge, necessitating the adoption of dispute resolution systems. These are issues developers are already investigating, preparing for the next generation of crypto finance solutions.

The Importance of Public and Private Keys

Thanks to the use of public and private keys, cryptocurrencies are seen as a highly secure transaction method. Compared to traditional means of payment, such as bank wires or credit and debit cards, crypto typically offers greater privacy and low to non-existent traceability, depending on the network.

How does this work in practice? The data’s secrecy, integrity, and validity are guaranteed to the receiver. While public keys are necessary for two parties to transact with one another, private keys add a level of security, ensuring only you can confirm or accept a payment involving your crypto wallet.

The material encrypted with the public key can only be decoded with the private key to ensure confidentiality. And because verifying that the received message matches the message sent is part of the decryption process, integrity is assured. The public key cryptography (PKC) framework includes these keys; they both fit together, boosting each other’s utility.

Keys in a black door handle of a white door

Public Keys

As the name suggests, public keys can be distributed to everyone else without the fear of being exposed. That’s the whole point — they serve as a public identifier people can use to send you crypto or bill you for purchases you make using it.

For instance, social media is full of crypto addresses that are shown on publicly accessible pages for content creators on the internet. If they didn’t share their public keys, people would have no way of paying them for the content they make. Bitcoin and other cryptocurrency transactions rely on the use of a public key, after all.

Furthermore, public keys are used to accept payments, though you’d still need to confirm with your private key as well. A private key is linked with a cryptographic code. A key pair is established and consists of a public and private key.

By relying on the pair of keys together for transaction verification, the user’s crypto wallet is more secure. Even if half the planet knows your public key, they cannot do anything to your account without your private one.

Private Keys

As mentioned above, private keys are necessary to authenticate transactions. Unlike public keys, you’re never supposed to share your private keys with anyone. You need to store them in a secure place, preferably offline.

Private keys are used to sign transactions and allow the money to be spent. The use of a public and private key for encryption and decryption ensures that the data is exactly what the sender claims it is, i.e. this double verification lowers the chances of fraud and abuse.

Just like any other cryptocurrency, Bitcoin relies on public and private keys to function. Without the need for third-party verification, these keys let you transmit and receive crypto freely. This guarantees that only the intended recipient has access to the funds and transaction information.

How Do Public and Private Keys Function?

A variety of cryptographic techniques is implemented in blockchain technology. Wrapping your head around all of the tools involved might seem daunting, but understanding how the security of your crypto wallet works will be beneficial in the long term. Would you go about using a credit card if you didn’t know anything about interest rates or card information theft?

As we already explained, key cryptography brings into action a pair of public and private keys. Private keys are hidden, while public keys are freely generated.

Moreover, a crypto wallet is made up of a set of public and private addresses. Anyone can deposit Bitcoin or other crypto into a public address. However, money cannot be withdrawn without the private key. Thus, the final control and ownership of crypto coins are represented by private keys.

fingerprint sign linked to crypto public and private keys

Every public key in public-key cryptography corresponds to just one private key; both of them work together to encrypt and decode communications. Their corresponding private key is used to decode a message using the public key of the user.

It must be noted that it’s critical to safeguard one’s private keys to prevent loss or compromise. Consider a private key to be similar to the key to a business’s front door, of which only you have a copy. That is the most important distinction between the two sorts of keys: only you have access to the entrance door thanks to the private key. Thus, you use it to decrypt encrypted messages and keep your wallet safe.

Some have compared public keys to a web address for a business – they’re public, and anyone can look them up and disseminate them around. Furthermore, in asymmetric encryption, everyone in the system can exchange public keys. Once the sender has the public key, they use it to encrypt their communication.

Computers, cellphones, USB drives, specialised hardware wallets, and even a piece of paper may store private keys. So, how do you choose among these options?

The optimal form of cryptocurrency storage will be decided by how frequently you want to use it. A password-protected mobile phone or PC is the most practical way to store crypto tokens for everyday use. If you plan to exchange or spend your tokens regularly, you’d need your keys often. A hot wallet might work best in this scenario.

Meanwhile, hardware wallets can assist with cold storage by signing transactions that do not compromise the private keys. Because they store your tokens offline, cold wallets cannot be stolen or hacked. This feature makes them far more secure, but they might also be a bit more burdensome to use. Still, hardware wallets are a good option if you:

  • Plan to hold crypto for a long time without using or exchanging it;
  • Have amassed a substantial cryptocurrency portfolio that you need to safeguard at all costs.

Data Security: End-to-end Encryption

Data protection takes place at the device level using genuine and secured end-to-end encryption, which prevents data from being read. Encrypted before they leave the phone or computer, messages and data aren’t decoded until they arrive at their destination. This is considered the gold standard for communication security. Only the sender and the intended recipients and no one else has access to the data in an end-to-end encrypted system.

In line with this, because they lack the private keys required to decode it, hackers and other ill-meaning third parties cannot access encrypted data on the server. Instead, private keys are saved on the device of each individual user, making it far more difficult to access that person’s data.

A bitcoin with a key in the middle on a blue background

Disclaimer: Trade at Your Own Risk!

Bitcoin, like all other major cryptocurrencies, is based on public-key cryptography, which is a cryptographic system that employs two types of keys: public keys that are widely known for identification and private keys used for authentication and encryption. This two-tier system gives cryptocurrencies a high degree of security and privacy.

Despite these advantages, cryptocurrency values continue to fluctuate as countries consider how and if to regulate the crypto sector. Without sufficient information, investments in this field can sometimes be a boom or bust for amateurs.

Investing in cryptocurrencies, Decentralised Finance (DeFi), and other initial coin offerings is highly speculative and dangerous, with markets that may be quite volatile. Before making any financial decisions, get advice from a certified specialist. This post does not constitute investment advice by Dart Europe or the author, nor can the accuracy or timeliness of the information be guaranteed.