Cryptocurrency Fundamentals: Digitally Signed Transactions
Let us look at how Cryptography enables Digital Wallets that are analogues to Bank Accounts and how Transactions are performed and verified by an Example of issuing a Cheque from a Payer to Payee.
John Smith’s wife Jane needs to go to a concert however, she is almost broke. She asks her darling husband to lend (probably) her money to go see the concert with her friends. John Smith writes her a cheque of $150. To make sure the credit ends up in Jane’s account that she can later withdraw, he needs to correctly fill in a few details the Amount $150 (both in numeric and words to make sure Jane does not add an extra zero at the end if it is just in numeric form), the data of issuing, the Payee or the receiver of the amount (Jane in this case) and sign it with ink in his unique writing.
Now, let us transcend into the Crypto world and see how things work. Before John even had a bank account, he went to a banking executive to do KYC. He was required to prove his identity and submit a certain documents that resulted in the executive creating a Bank Account for him. In the crypto world, the Banking Executive is a piece of code.
The Oracle generates a Private Key, and Public Key along with Wallet Address are algorithmically derived from it using a sequence of Hashing Functions. And as we saw in the last post, it is really hard to get back from the resulting hash to the input. So even, if everybody knows John’s Wallet Address and Public Key it is nearly impossible to get hold of his Private Key. Private Key is something that John cannot share with anyone, if someone gets hold of it they can essentially withdraw funds from his account, kind of similar to the login password for Online Banking Accounts.
The Wallet Address is the Unique Identifier for John’s crypto store that other users can use to send money to John and also use it to verify validity of transactions that John sent to other payees.
What is the Bank Cheque Equivalent in Crypto World ?
A very simplified version of a Crypto transaction would be a Message containing the amount to be transferred, the recipient and the memo. And then John signing it with his Private Key to create a Digitally Signed Transaction.
For Jane to redeem the $150 cheque issued by John, she will go to the bank and deposit the cheque and a banking executive will verify the authenticity of the cheque, if John has sufficient balance and manually compare the John’s ink signature with the one that the bank has in record.
In the decentralized world, without the existence of a central authority to perform such validations. Any participant can take this signed transaction and the message that fed into the transaction and verify that it was indeed signed by John by checking if the algorithmically retrieved Wallet Address from the transaction is John’s.
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