Safely Send Cryptocurrency: Understanding Public Key Encryption

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Safely Send Cryptocurrency: Understanding Public Key Encryption Safely Send Cryptocurrency: Understanding Public Key Encryption

On the surface, sending cryptocurrencies is a straightforward three-step process: paste a wallet address, select how much to send, and hit confirm. Although transferring digital assets has become more user-friendly on many decentralized wallets, there's a lot of complex cryptographic choreography behind the scenes. One crucial element that makes peer-to-peer (P2P) transfers possible is a long alphanumeric string called the public key. 

Public keys look random to human eyes, but they play an essential role in communicating with blockchain networks, deciphering crypto transfer data, and preserving each crypto trader's online privacy. 

Anyone interested in swapping or storing cryptocurrencies should learn the basics of public key infrastructure. Let’s explore public key cryptography, including how it works in encryption and helps traders protect their portfolios and use digital assets in Web3

What is a public key in crypto?

In cryptocurrency, the public key is a unique code that serves as the mailing address for a crypto wallet. Although public keys link to distinct wallet addresses on different blockchain networks, traders don't have to worry about revealing sensitive info when sharing these details. Thanks to advanced cryptographic protocols, there's no way to use a public key to break into a user's crypto wallet, which makes it possible to securely send or request cryptocurrencies and transfer them on P2P networks. 

Think of crypto public keys as similar to email addresses, bank account numbers, or postal addresses, each giving people a way to send letters or funds without giving away private access to the recipient's account. 

Public key versus private key: Explaining the cryptographic key connection 

The public key in a crypto wallet is connected to another code called the private key through a cryptographic network known as the Secure Shell Protocol (SSH). Both keys have similar-looking strings of letters and numbers, but only the private key gives crypto traders access to the digital assets stored in their wallets. Crypto users need their private key to confirm (or sign) transactions when sending cryptocurrencies on a blockchain. Whoever holds the private key for a crypto wallet has the ability to shift cryptocurrencies wherever they want. 

Although each public key links to the private keys deciphering private keys from public keys is impossible. Crypto wallets use a one-way cryptographic function, meaning blockchains only derive public keys from private keys and can't reverse engineer them. This feature lets crypto traders send their public keys when transferring coins while preserving their private key data. 

How does public key encryption and decryption work?

When crypto traders download a new self-custodial crypto wallet, they generate SSH keys using cryptographic algorithms like Rivest-Shamir-Adleman (RSA) or Elliptic Curve Cryptography (ECC). These public and private keys use one-way math equations called trapdoor functions, making it easy for blockchains to figure out the public key from the private key, not vice versa. 

When traders transfer cryptocurrency to another user's public key, they send an encrypted message to the associated blockchain address. The only way to decrypt this transaction data is with the public key's associated private key, which ensures only the wallet's owner can initiate and authenticate crypto transfers in an account. 

Are public keys the same as blockchain addresses?

Public keys and blockchain addresses serve the same purpose on a crypto wallet but aren't twin identifiers. To create a blockchain address, crypto wallets send public keys through a cryptographic hash function to create a shorter, fixed-length string of letters and numbers. 

Like creating public keys from private keys, the hashing function used to create blockchain addresses uses a one-way algorithm. Although a blockchain address links to a unique public key, there's no way to reverse engineer the address to derive the public key data. 

Blockchain addresses are more compact than public keys, making them increasingly convenient and less prone to errors when traders use them on exchanges or with fellow crypto users. Sharing public keys when receiving cryptocurrency is safe, but traders typically rely on blockchain addresses because they're easier to use. 

Precautions when using public keys in blockchain 

Just because encryption algorithms make sending public keys safe doesn't mean there aren't security precautions. Public keys won't reveal private key data, but traders who misuse them risk losing their entire crypto portfolio. Here are a few points to keep in mind when working with public keys:  

Only send crypto to compatible blockchain addresses

Crypto wallets don't have a master public key that accepts every digital asset. Each cryptocurrency operates on a distinct blockchain network, so traders must ensure the blockchain address matches the coin they want to send. If users send crypto to an incompatible address [e.g., transferring Bitcoin (BTC) to a Bitcoin Cash (BCH) address], there's no way to recover their cryptocurrency. 

Copy-paste or use QR codes

Since blockchain addresses are random alphanumeric strings, traders can make mistakes when manually typing them. To avoid the risk of human error, take advantage of copy-paste functions or QR codes when sharing public keys or blockchain addresses.

Use human-readable public keys

To reduce the odds of typos or copying the wrong blockchain address, create personalized public keys with protocols like the Ethereum Name Service (ENS) or Unstoppable Domains. These services let traders associate a short and memorable name with their public key (e.g., Charles.eth or Kathy.eth), eliminating the need for complex identifiers and making transfer authentication smoother for crypto users. 

Test with a fraction of crypto

It's a good habit to send a small amount of crypto whenever using a blockchain address for the first time. Although this tactic costs extra gas fees, it gives traders peace of mind and ensures they won't make a costly mistake when sending large amounts of crypto.  

Become a blockchain expert on dYdX Academy 

Want to learn more about cryptography, blockchain, and Web3 technologies? Head to dYdX Academy. From ZK rollups and hashing functions to oracles and soulbound tokens, our in-house library has dozens of easy-to-read guides on the latest high-tech trends in crypto. 

dYdX also offers a decentralized trading platform for eligible traders interested in swapping perpetual contracts. Find out the latest details on dYdX's features and offerings on our official blog, and start trading on dYdX today. 

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