How cryptography can be used to make digital transactions secure

In our current times transactions are conducted online more than ever before. We use technology to do things like online banking, ecommerce, and investing— all of which involve sensitive and valuable information.

In December 2022 alone, the value of UPI transactions stood at INR 12.82 lakh crore. At the end of the calendar year 2022, UPI’s total transaction value stood at INR 125.95 lakh crore, up 1.75 times year-on-year.

As such, security is a top concern when it comes to digital transactions. Cryptography is a way of securing communication that has been used for hundreds of years. It is a technique used to ensure secure communication in the presence of third parties and involves the use of mathematical algorithms to transform data into a form that is unreadable to unauthorized individuals.

Cryptography in traditional finance

It is largely used to protect sensitive information like financial transactions, passwords, and other personal data. In the traditional finance world, cryptography is used in a number of ways, the most common being to keep transactions and communications secure. For example, when you make an online payment using UPI, the information is encrypted using secure cryptographic algorithms to prevent unauthorized access and ensure that the transaction is secure. It is also commonly used to identity verification and access control.

Banks too, use digital signatures and cryptographic keys to verify users and make sure that only authorized people can see sensitive information.

One of its other uses is in digital signatures. To put it simply, a digital signature is a cryptographic technique used to verify the authenticity of a message or document. It works by using a mathematical algorithm to create a unique digital fingerprint of the message or document, which is then encrypted using the sender's private key. The recipient can then decrypt the signature using the sender's public key to verify that the message or document is authentic and has not been tampered.

These digital signatures are commonly used in electronic transactions like online banking and ecommerce. They provide a way for both parties to verify the authenticity of the transaction, ensuring that it is secure and cannot be tampered with by unauthorized individuals.

Another usecase is symmetric-key cryptography which involves the use of a single key to encrypt and decrypt data. This key is shared between the sender and the recipient to ensure that the transaction is secure and confidential. Symmetric-key cryptography is commonly used in electronic banking transactions. When a customer initiates a transaction, the bank encrypts the transaction data using a symmetric key that is shared between the bank and the customer. The customer can then decrypt the data using the same key to verify the transaction.

Cryptography in the crypto world

In the crypto world, technology like Bitcoin and Ethereum rely heavily on cryptography to secure transactions and protect the integrity of the blockchain. Algorithms like SHA-256 and elliptic curve cryptography are used to generate digital signatures and secure transactions on these platforms.

Cryptography also comes into play through the us of public-key cryptography. This is a technique that uses two keys—a public key and a private key—to encrypt and decrypt data. The public key is used to encrypt the data, while the private key is used to decrypt it. This method ensures that the data is secure and cannot be read by unauthorized individuals.

Public-key cryptography is commonly used in cryptocurrencies such as Bitcoin. In a cryptocurrency transaction, the sender encrypts the transaction using the recipient's public key. The recipient can then decrypt the transaction using their private key to verify that it is valid and has not been tampered with.

Hash functions too use cryptography. A hash function is a mathematical algorithm that generates a fixed-length output based on the input data. This output is known as a hash value, and it is unique to the input data. Hash functions are commonly used to verify the integrity of data in digital transactions.

In a blockchain transaction, for example, a hash function is used to create a unique digital fingerprint of the transaction data. This fingerprint is then added to the blockchain, where it can be easily verified by other nodes on the network. By using hash functions, blockchain technology ensures that the transaction data is secure and cannot be tampered with by unauthorized individuals.

Cryptography plays a critical role in securing and verifying transactions in the digital world. It provides a way to ensure that sensitive information is secure and cannot be accessed by unauthorized individuals. By using cryptographic techniques such as digital signatures, public-key cryptography, hash functions, and symmetric-key cryptography, we can ensure that transactions are secure, verifiable, and tamper-proof. As we continue to rely on technology to conduct transactions, the use of cryptography will become increasingly important in ensuring that our data is protected and secure.

Rajagopal Menon comes up with 20 years of experience. He is currently the Vice President of WazirX.