From cryptography to the crypto currency gold rush

By Lwasa Mukasa

Currency is our creditworthiness in liquid form which we use to trade goods/favours instantaneously.

 Almost all national currencies in the world in use today (U.S. dollar, EU euro, British pound, Uganda Shilling, …) are “fiat” currencies, with the British pound being the oldest fiat currency dating back to 1694.  

A fiat currency is a currency that has been declared as legal tender by a government and is not backed by tangible assets like gold or silver.  

With security developments that cryptographic technology has unleashed, a new type of currency, Crypto Currency, which is based on Cryptography, has been developed and has attracted wide coverage lately.  

But unlike fiat currencies that are created and owned by countries, crypto currencies are created, owned and controlled by any entity that has the technical knowhow to create a crypto currency.

 As such, whereas there are less than 200 fiat currencies worldwide, there are thousands of crypto currencies worldwide with the vast majority worthless.
Before we delve into Crypto currency, let us briefly go over the technology behind this new financial instrument and how two critical tools of this technology, the Private Key and the Public Key, are created.

Cryptography, Encryption
“One Key” Encryption: In very basic terms, encryption is the process of taking a straight forward file (a text message, a video file, an audio file, …) and then converting it to hide its original meaning using a string of bits (letters, numbers, ..) called a “Key” such that only the receiving party that has access to the Key can reconstruct the original message.

 Cryptography, on the other hand, is the science of creating and breaking codes (the “Keys”).  The more complex and harder to decode a given Key is, the more secure communication is between parties using that Key.  

Most early encryption algorithms used very basic Keys (like the one used by Julius Caesar where each letter was transposed) and the encrypted messages were decoded very easily by unintended recipients.  The science of cryptography introduced very complex mathematical algorithms for creating cryptographic Keys which made deciphering encrypted messages extremely hard.  

But even as cryptography advanced, encryption with one Key where the Key had to be shared between the sender and the receiver still had an Achilles heel – no matter how strong the Key was, once that shared Key got in the wrong hands then all communication was compromised.  

Perhaps the most famous incidence of this was the Allied forces in WWII getting hold of an Enigma machine from a captured German U-boat and successfully decoding the Enigma code the Germans used to communicate between the German High Command HQ and the field.  Once the Enigma Key was decoded, the tide of the war swiftly turned in favor of the Allies.

The “one Key” encryption problem was solved by the introduction of “2 Key” cryptography which ensured secure communication and without which Crypto Currency would not have evolved nor would we be enjoying most of the digital services we take for granted today.  

Encryption with Two Keys – Private Key, Public Key:  If one takes two very large prime numbers “s” and “t” each say 50 digits long and multiplies them together to get an even larger product “r” (r = s x t), if the product “r” is revealed it is extremely difficult even with very powerful computers to work backwards to determine the two prime numbers “s” and “t”.  

In 1978, three MIT scholars (Ronald Rivest, Adi Shamir, Leonard Adleman) published a paper which detailed a Public-Key algorithm for generating two very large mathematically related cryptographic Keys, a milestone that ushered in secure encrypted communication.  

The algorithm cryptographically generates a very large number, which is called the Private Key.  Another very large number that is mathematically related to the Private Key number is then also cryptographically generated.  This second number is known as the Public Key.  Any message encrypted using a Public Key can be decrypted only with its corresponding Private Key.  

An entity owns both a Private Key and its corresponding Public Key.  The Public Key can be shared with anyone but the Private Key is never shared.  So if Paul wants to send an encrypted message to Mary, Paul asks Mary to send him her Public Key.  

Paul then encrypts the message using Mary’s Public Key and sends it out.  Anyone can intercept the message sent by Paul but only Mary can decrypt it with her corresponding Private Key which she never shares with anyone.  This is how 2-Key cryptography enabled secure communication. 

The Rivest, Shamir, Adleman (RSA) 2-Key cryptographic algorithm evolved in the famous industry standard RSA algorithm widely used for secure data communication.

 Today there are many complex public 2-Key cryptographic algorithms (RSA, Elliptic Curve Cryptography, Digital Signature Algorithm, …) used to generate cryptographic Private/Public Key pairs.  But the general process is the same – generate a large cryptographic number, the Private Key, from which a second mathematically related cryptographic number, the Public Key, is generated.  

With the advent of cryptographic Public/Private Key encryption/decryption, digital financial transactions with Credit cards exploded and were soon followed by Debit cards transactions.

 Today secure money transactions via our digital devices (phones, computers, …) owe their immense popularity to this 2-Key cryptographic technology.  But it should be noted that even 2-Key encryption does not guarantee complete security but the larger and more complex the Keys are, the harder they are to decipher.  Some very large Keys generated years ago have never been decoded.

With all fiat monetary currencies already vastly digitized, it was now possible to envision a time when paper/coin money was a thing of the past – all currency transactions would be digital.
 

Crypto Currency
The Geeks have their Say:  With Public Key/Private Key end-to-end secure communication now possible, it was not long before the idea of independence from the standard fiat currency system started evolving.  Since fiat currency transactions (credit cards, debit cards, money transfers, …) depend on electronic computer systems without physical money changing hands, what if the base currency was none of the fiat denominations but another form of currency?

The idea of non-fiat digital currency with a decentralized monetary system designed and managed by “the public” where banks and governments would not control the financial tools that we all now depend on for our daily lives started taking root.  

Satoshi Nakamoto, Bitcoin inventor:  On October 31, 2008, a white paper by “Satoshi Nakamoto” (who has never revealed who he/she is or they are) synthesized decades of work in cryptography and computer science and proposed a detailed a peer-to-peer electronic cash system based on a new currency and that bypassed banks.  Instead of the financial systems/transactions depending on a web of computers owned by banks, they would instead depend on a web of computers owned by the people conducting those transactions.  

Instead of using the traditional fiat currencies, the new system would use digital Crypto Currency which would be bits of Encrypted Computer Code in a Digital Ledger.  This Ledger, the nerve center of a crypto currency, would hold the currency owner’s Private Key and would be connected to one’s Digital Wallet via their Public Key.   

Bitcoin:  Satoshi named this new crypto currency Bitcoin and today Bitcoin is the most widely used crypto currency.  There are thousands of digital currencies besides Bitcoin but from here on we are going to focus on how Bitcoin is generated, used and controlled.  However, the process we are going to discuss is the same for other crypto currencies. 

Crypto Wallet:  Satoshi proposed that each owner would have a digital crypto Wallet which would hold their Private Keys.  These digital crypto Wallets would be identified by their owners’ Public Keys.  The Bitcoins would reside on the digital Ledger.  The Private Keys in the digital Wallet would be used to access the digital Ledger where one’s actual Bitcoins would reside. 

Blockchain:  Satoshi named the digital Ledger where all Bitcoins would reside and that would also track all Bitcoin transactions Blockchain and it would reside on multiple decentralized systems around the world.  At regular intervals, every Bitcoin transaction around the world would be assembled in a “digital block”.  This digital block would have all the relevant data specific to every Bitcoin transactions (identity of Bitcoins used and the parties involved, date/time stamp, nature of transaction, … or when a new Bitcoin is created.) during that interval.  This block would then be run through a cryptographic algorithm called a Hash Function which would return a “Hash” value and this Hash value would then be appended to the block.  [Cryptographic Hash functions are mathematical functions used to ensure a very high degree of security].

Each block would start with the Hash of the previous block, and then all worldwide transactions data from the previous interval (say five minutes) would be added to it and a new Hash would be created for this new block.   The new block would then be connected to the end of the last block, thus creating a chain of blocks, hence the name Blockchain.  Users (systems/nodes) around the network would take turns creating new blocks and the other systems would then verify the new block had been Hashed correctly, after which all worldwide systems/nodes would update their systems with the new block which would ensure all systems had the same data. 

Decentralization would render tempering with the Blockchain easily detectable.  The Blockchain would also record the precise order of transactions whereby if someone tried to “instantly” use a Bitcoin more than once, one transaction would be approved and the other would be denied.

A Bitcoin Blockchain is in essence a distributed public ledger that contains the history of every transaction involving Bitcoin crypto currency. Anyone can download a copy of the Blockchain, and it can be inspected to trace the path of Bitcoins from one Bitcoin transaction to another – the ownership history of any one Bitcoin can be traced from its inception to its current owner. 

Each crypto currency has its own Blockchain (Ledger) used to track its own transactions involving its currency.  These Blockchains contain the owners of the crypto currencies anonymously, their crypto currency balances as well as a record of all the transactions executed between network participants.

Fiat money circulation is controlled by central banks but with Bitcoin Blockchain being publically and collectively managed by all nodes/systems in the system, how would the number of Bitcoins in circulation be controlled and who would create new blocks?

Bitcoin Mining:  Satoshi’s answer was to have only one entity/system/node in the worldwide network create a new block of all worldwide transactions in the last time interval (say ten minutes) and then reward that entity with newly minted Bitcoins. But how would a specific node/entity be selected to create the new block?  Satoshi proposed a system where the entity that first solved a very hard cryptographic puzzle would earn the right to create the newest block and in turn be rewarded with new Bitcoins.  Solving these puzzles and getting rewarded with Bitcoins is what is known as Bitcoin Mining and it is the same way other crypto currencies are minted/mined. 

So instead of a central bank controlling the money supply, “mining” is how new Bitcoins are introduced into the system with their supply automatically regulated by software. As more coins are mined, the reward decreases, and the proof of work puzzle gets harder to solve.  Needless to say, the race to be the first to solve these complex puzzles requires a lot of computational resources in terms of hardware and uses a lot of power (lots of powerful high-speed computers that require massive cooling systems).   

Bitcoin as a Currency:  The proof of concept that Bitcoin could be used as a currency started with a single transaction where someone proposed to pay for some goods (a beer?) with Bitcoins, and once that transaction went through more transactions followed.  At the beginning Bitcoins were worth pennies but as more people joined the network and started trading goods and services with Bitcoins, Bitcoin speculation took off and its value skyrocketed, peaking at $65,000 in 2021.  Bitcoin evaluation has also been influenced by the fact that its supply has been capped to 21 million coins.

Non-Fungible Token (NFT)

NFT (Non-Fungible Token):  Just about anything in digital form can be copied and used without the explicit permission of its creator.  Taking a page from the technology behind Crypto currencies, digital artists started wondering whether their digital artwork could be made unique and uncopiable using crypto currency technology.  At a 2004 conference, it was demonstrated that a digital file could be cryptographically encrypted and put on a Blockchain where it could be viewed but user access to it was controlled by only the entity that had the Private Key to it. 

In other words, any digital item (artwork, video, picture, music, document,…) could now be stored on a Blockchain with certifiable authenticity controlled by a Public Key and a Private Key.  Furthermore, its ownership could be passed from one party to another just like Crypto currencies are traded.  This new non-currency crypto file that would reside on a decentralized Blockchain similar to a Bitcoin Blockchain is what came to be called a Non-Fungible Token, or NFT – it is one’s original digital file which has now been transformed with cryptography into a unique file residing on an NFT Blockchain and whose ownership is controlled by a Private Key that resides in the owner’s NFT digital Wallet. It was now possible for anyone to put their digital work on the internet without fear of it being used/copied without the owner’s permission.

NFTs can be used to eliminate tempering of one’s unique work (like a family will or trust).  They can also be unique collectible items or original works that can be sold and used by the respective parties.  Some traded NFTs have been very profitable because cryptographically encrypting them made them unique and exclusive.   [The first tweet, “just set up my twttr”, was from Tweeter founder Jack Dorsey and sold as an NFT in 2021 for $2.9m.]

Just like crypto currencies, each NFT transaction initiation includes the Private Key of the previous owner (to authenticate and sign away ownership) and that of the new owner (to assign that NFT ownership to that Private Key).  And just like crypto currency transactions are tracked on their Blockchains, each NFT transaction is recorded on an NFT Blockchain and can be traced from its inception to its current ownership. 

Ethereum, Ether:  In 2015 a new NFT Blockchain platform called Ethereum was introduced with its own Ethereum Blockchain.  It is by far the biggest Blockchain platform in the world, dwarfing Bitcoin transactions by a mile.  Ethereum currency is Ether (ETH) and is mined the same way Bitcoins are mined.  It is used for all transactions on Ethereum where one uses fiat currency (like dollar) to buy Ether. 

Crypto Exchanges:  Just like we have the NYSE, NASDAQ or other stock exchanges for normal stock trading, there are a number of Crypto Exchanges that specialize in the buying or selling of Crypto currencies and/or NFTs.  There is no regulation for these exchanges and some have recently collapsed spectacularly resulting in massive monetary losses for investors.

Fool’s Gold?  In any technical discussion, it is important to separate the technology from the product that uses that technology.  Blockchain technology on which crypto currencies are based has a lot of potential in many fields but no one has articulated a similar case for crypto currencies (Bitcoin, Binance, Tether, Ether, Dogecoin, ..) which number in the thousands and are still growing since any entity with the technical knowhow can start its own crypto currency. 

Only one country, El Salvador, has officially adopted crypto currencies as legal tender.  On the opposite end, China and Saudi Arabia have officially banned the use and mining of crypto currencies mainly because there are no tangible assets to back them up not to mention any regulation of this new currency.

Those who create and manage crypto currencies and their Blockchains and exchanges have gotten rich but the same is not true for many ordinary investors.

A February 23^rd 2023 Wall Street Journal article stated that the 2022 crypto crush wiped out roughly $1 trillion in value and scared many investors, but this has not stopped speculative investment in this financial instrument.  So investor beware – as the old saying goes, the only people who make money in a gold rush are the ones selling shovels.

[Below is an example of a randomly generated 64 hexadecimal digit (256 binary bits] Private Key.  To crack a 64-bit hexadecimal Key, the answer is one of ‘16 to the power 64’ possibilities!!!]

4E89AADB33C8750BD130ED19A261E6E52CED340AC55A2E9C6ED2FFC0A52B023C

Lwasa B. Mukasa.

lbmukasa@gmail.com