June 7, 2019
Ultimately, a private key is a mathematical way for you to prove/spend the cryptocurrency associated to the paired public key. What is a public key you ask? Both a private key and public key are generated as pairs and they are linkedcryptographically. The public key is the address you can use to share publicly so that others can send you the corresponding cryptocurrency. So you'll have a public address for Bitcoin and another for Litecoin and so on. What is cryptography? As you can see, we can get into a deep rabbit hole here. Without going too deep in the subject and not getting out of scope of this blog post, cryptography is a mathematical way to protect information and communication using sophisticated and tested methods of codes so that only the intended receiver can read or process your message. In other words, cryptography is a way to protect the information you want to send to another party. If an unintended party receives your message, while using the correct cryptographic methods, the unintended party will have a vastly difficult time from reading your message. The subject runs deep and there are industries focused on perfecting and improving these methods, along with ever evolving threats such as quantum computing which at one point was only science fiction.
Every cryptocurrency you'll discover on your journey has a public and private key to distinguish one user's ownership from another. A typical cryptocurrency is built on a new-ish technology called blockchain, which eliminates the double-spend problem, and makes it computationally and financially difficult to hack because of the way blocks are appended to the end of the series of blocks, hence block-chain.We'll get into that in another blog post. The public key is intended to be public and is what you share with others in order for them to send you cryptocurrency. The private key is intended to remain private and is the way you spend the cryptocurrency.
Through the implementation of blockchain, you're able to send value like currency to another individual without the need of a third party. Sending someone a bitcoin is the virtual equivalent of handing over physical fiat currency to another individual. The benefit here is that you can hand over value across the globe or potentially across the galaxy (with a suitable connection) without having to rely on a business to process a transaction. All of this accomplished through cryptography and ultimately the private key you hold and keep safe. All transactions using this method are final.
As you might imagine, cryptocurrencies are the internet's manifestation of actual currency.When you're dealing with value, there is an inherent incentive for people to collect as much of it as they can how ever they can. As a result, hackers have the knowledge base and the know-how to hack and discover your private key. The side-effect of creating digital currency is that you and I have the responsibility of protecting our own money. This means that a private key either exists on your phone, computer, or a digital device and depending on what device you're using, it can be susceptible of getting compromised.
This is where things can get tricky. There is a risk tolerance issue at play here as well as a host of other factors such as convenience. Lets go through this exercise philosophically. Since we're dealing with value and incentives, the most mouthwatering place a hacker could dream up is for everyone to store their private keys all in a single place. Seems like an obvious bad idea right? Well this is what's happening right now at cryptocurrency exchanges. Almost all cryptocurrency exchanges hold your private keys for you and only some do a reasonably good job at protecting them. Some well known exchanges have insurance specifically for hacks and others have been hacked more than twice losing several millions of dollars of user's funds each time. With this high level of risk, its also relatively convenient to store and trade crypto. The majority of private keys are stored in these centralized exchanges, however there are decentralized exchanges in development and a few in current operation. Then there's a concept of hot and cold wallets. These are wallets that store your cryptocurrency either an online account or an offline account.
Cryptocurrencies can be stored in one of the 2 classifications. Your private keys are either accessible via online methods or only accessible via offline methods. There's also another method called hybrid wallets that take elements of both the classifications. Cold wallets tend to be the most secure, with the caveat that you know exactly what you're doing, which in and of it self is another blogpost.
If you're going to be trading cryptocurrency, use the exchanges that offer insurance in case of a major hack. Coinbase and Binance are the most prominent in the bunch. The most secure way to protect your cryptocurrency is to use either the Nano Ledger Nano X or the Trezor Model T. These are cold wallets also known as hardware wallets.They are designed to keep your private keys safe since the keys are generated from within the device and they never leave the device. When you receive the device, you have to perform a sweep of your cryptocurrency. A sweep simply means you take all your cryptocurrencies stored in the exchange you use or other wallets you have and send them all to your hardware wallet for maximum protection. If you hold your keys, you ultimately have control over what happens to them. Let us know if you have any questions or want us to go over any specific topics. Full disclosure, using these affiliate links help supportThe Block Runner at no cost to you.
