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The Keys to Crypto Kingdom: Wallet Address, Public and Private Keys Explained
If you want to send or receive crypto currencies and create acrypto wallet, you will be confronted with the concepts public key, private key,secretphrase and wallet address. You need to have a clear understanding of these terms to safely trade with and manage your crypto assets.
Don’t worry, however, these concepts are not as complicated as they seem at first! In today’s article, we will offer asimple, easy-to-understand explanation and a comparison with sending and receiving money in the traditional banking system.
First, however, we briefly need to talk about “cryptography” – after all the domain to which cryptocurrencies owe their name.
Cryptography
The term cryptography is derived from old Greek “kryptos” and means “hidden” or “write secretly”. The field of cryptography deals with how to encrypt and decrypt information as to keep information confidential and as to prevent unauthorized persons from accessing the information in transit. The domain was mainly pioneered and led by academic and military research.
For decades, encryption was done through using a secret phrase that sender and recipient used to encrypt and then decrypt the message – as the same secret phrase was used, this was also called “symmetricencryption”. However, downsides of this format where that if any unauthorized person gained access to the secret phrase, they could not only access the information but impersonate the sender and therefore cause even greater damage.
Asymmetric cryptography was pioneered in the 1970s and solved this problem by introducing the public-private key pair. The private keyisabig, random primenumber and can be used asunique ID specific to apartyto encrypt, decrypt or signa message or file.
Cryptography and more specifically asymmetric cryptography was the forefather and technological foundation upon which Satoshi Nakamoto created Bitcoin, hence the name “cryptocurrencies”.
Crypto keys come in pairs
Every crypto wallet consists of auniquepairof public and private keys. There is aone-way-relationshipbetween private and public key: through means of cryptography the public key for a private key is derived, hence a crypto-key-pair results.
However, it does not work the other way around. It isimpossible to derive the private key through a public key.Thesekey pairsallow to share the public key which can be used by others to encrypt or verify information.This is what so-calledasymmetric cryptographyis all about and was a big breakthrough in encryption when first developed in the 1970s.
What is a private key?
The private key is to a crypto walletsimilar towhat an ATM PINor Online Banking TANisto abank account. Every wallet hasone or multipleunique privatekeys.It is only known to the wallet owner and used to prove he rightfully owns the account and contained funds and can send transactions.
Each crypto transaction sent is signed with the wallet’s private key – that private key however is not revealed to any outside parties.
Just like you shouldn’t tell anyone your ATM PIN because they could use it to access your funds, you mustkeep your private key secure at all timesbecause other people could use it to access and send (steal!) your funds.
Because the private key would be a super-complicated random number256-bit-number, that is impossible to remember and note, the idea of thesecretphrase was invented.
What is asecretphrase?
If a user was to lose (and/or forget) the private key to his wallet, he could no longer access, manage or send the funds contained within the wallet. In short, the funds would irretrievably be lost. To avoid this from happening, there is a backup mechanism built into crypto wallets called the secret phrase (sometimes also referred to as mnemonic phrase, backup seed, recovery phrase).
Asecretphraseis a collection of 12-24 words that store all the information required to recover and access all the funds of a crypto wallet. It can be used to derive the private key of the walletas asecretphrase is a representation of the random number your private key is.
An example of a12 wordsecretphrase could be the following
donkey pony lizard comfort house frameignorepush glass cheap mousesecret
Walletproviders will instruct users to note the generatedsecretphrase on a piece of paper and storeitsecurely, out of reach for any third person.If any other person gets access to yoursecretphrase, they could steal all your crypto funds stored in that wallet!
What is a public key?
Thepublic keyof acryptowallet is derived from the corresponding private key using a mathematical function known as “elliptic curve multiplication”.
What is a wallet address?
Digital assets and crypto funds are stored in, or rather assigned to, a wallet address. A wallet address can be likened to a bank accountnumber/IBAN. The wallet address can be shared with another person and is used toreceive transfers of digital assets there.
The wallet address is mathematically derived from the wallet’s public key through a one-way function called “hashing”. The wallet address is a shorter representation of the public key’s final part and usually has a length of 160 bits.
If you want a friend to send you money,e.g.0,001 BTC, they will send the money to your Bitcoin wallet address you have provided them with.NOTE: Wallet address and public key are not the same, as the wallet address is the finalpartof the public key.
However, it is important to note that Bitcoin and Ethereum are not anonymous, but pseudonymous. Using a Blockchain explorer, any outside person canenter a specific wallet address and see all prior transactions of this wallet with other wallets.
The wallet address is a unique identifier of a crypto wallet. The wallet address format depends on the respective blockchain, but it usually consists of around 25 to 40 alphanumeric characters and includes numbers, letters and sometimeseven special symbols.
For example, the first Bitcoin address ever created was
1A1zP1eP5QGefi2DMPTfTL5SLmv7DivfNa
Thewalletaddress is safe to share, it allows others to send money there and check all prior transactions from and to that wallet address.
Wallet addresses don’t allowexternal users to see who owns the wallet as wallet addresses are typically not tied to a specific identity. This changes with exchanges like Blocktrade. As perKYC/AMLregulations, exchangeshave to determine the user’s identity and postal address, an exchange wallet addresscan therefore be connected with a user’s identity(but only the exchangecan see this information).
How they all work together
Now that we have explained private key, public key,secretphrase and wallet address, let’s discuss how they go together. When you create a crypto wallet with a wallet provider, you will receive all these four elements. Here is the role of each of these 4 concepts for you as a wallet user:
- You create aprivate keywhen creating a crypto wallet. You never do anything with it consciously, but it is used to sign your transaction when you send crypto assets.
- You create asecretphraseand store it safely on a piece of paper. You use it if you everhave torestore your crypto wallet funds after losing the private key.
- Thepublic keyis used to verify that you are the owner of a wallet address and that you can receive crypto assets. You personally don’t use your public key when making or receiving a transaction.
- You tell yourwallet addressto the sender if you are to receive a transaction or use it if you yourself send money there from another wallet of the same cryptocurrency.Likewise, you need the wallet address of a recipient if you are to send crypto assets to them.
Disclaimer:
This is not financial advice. Mentioning coins and tokens is not a recommendation to buy, sell, or participate in the associated network. We would like to encourage you to do your own research and invest at your own risk.
- Orginally published August 5, 2021
- 1:43 pm
Editorial team
We are a team of crypto enthusiasts. Each of us has extensive theoretical and practical experience in trading, cryptocurrencies, and blockchain. We also like to dig deep and explore. Our goal is to help you make the right and relevant decisions.
