Proof of Stake Explained

What is Proof of Stake?

The Proof of Stake consensus algorithm was introduced back in 2011 on the Bitcointalk forum to solve the problems of the current most popular algorithm in use - Proof of Work. While they both share the same goal of reaching consensus in the blockchain, the process to reach the goal is quite different.

How does it work?

The Proof Of Stake algorithm uses a pseudo-random election process to select a node to be the validator of the next block, based on a combination of factors that could include the staking age, randomization, and the node’s wealth.

It’s good to note that in Proof of Stake systems, blocks are said to be ‘forged’ rather than mined. Cryptocurrencies using Proof of Stake often start by selling pre-mined coins or they launch with the Proof of Work algorithm and later switch over to Proof of Stake.

Where in Proof of Work-based systems more and more cryptocurrency is created as rewards for miners, the Proof-of-Stake system usually uses transaction fees as a reward.

Users who want to participate in the forging process, are required to lock a certain amount of coins into the network as their stake. The size of the stake determines the chances for a node to be selected as the next validator to forge the next block - the bigger the stake, the bigger the chances. In order for the process not to favor only the wealthiest nodes in the network, more unique methods are added into the selection process. The two most commonly used methods are ‘Randomized Block Selection’ and ‘Coin Age Selection’.

In the Randomized Block Selection method the validators are selected by looking for nodes with a combination of the lowest hash value and the highest stake and since the size of stakes are public, the next forger can usually be predicted by other nodes.

The Coin Age Selection method chooses nodes based on how long their tokens have been staked for. Coin age is calculated by multiplying the number of days the coins have been held as stake by the number of coins that are staked. Once a node has forged a block, their coin age is reset to zero and they must wait a certain period of time to be able to forge another block - this prevents large stake nodes from dominating the blockchain.

Each cryptocurrency using Proof of Stake algorithm has their own set of rules and methods combined for what they think is the best possible combination for them and their users.

When a node gets chosen to forge the next block, it will check if the transactions in the block are valid, signs the block and adds it to the blockchain. As a reward, the node receives the transaction fees that are associated with the transactions in the block.

If a node wants to stop being a forger, its stake along with the earned rewards will be released after a certain period of time, giving the network time to verify that there are no fraudulent blocks added to the blockchain by the node.

Security

The stake works as a financial motivator for the forger node not to validate or create fraudulent transactions. If the network detects a fraudulent transaction, the forger node will lose a part of its stake and its right to participate as a forger in the future. So as long as the stake is higher than the reward, the validator would lose more coins than it would gain in case of attempting fraud.

In order to effectively control the network and approve fraudulent transactions, a node would have to own a majority stake in the network, also known as the 51% attack. Depending on the value of a cryptocurrency, this would be very impractical as in order to gain control of the network you would need to acquire 51% of the circulating supply.

The main advantages of the Proof of Stake algorithm are energy efficiency and security.
A greater number of users are encouraged to run nodes since it’s easy and affordable. This along with the randomization process also makes the network more decentralized, since mining pools are no longer needed to mine the blocks. And since there is less of a need to release many new coins for a reward, this helps the price of a particular coin stay more stable.

It’s good to remember that the cryptocurrency industry is rapidly changing and evolving and there are also several other algorithms and methods being developed and experimented with.

What Is Ripple?

Formerly known as OpenCoin, Ripple is a privately held company that is building a payment and exchange network (RippleNet) on top of a distributed ledger database (XRP Ledger). The main goal of Ripple is to connect banks, payment providers and digital asset exchanges, enabling faster and cost-efficient global payments. 

History

Ripple was first idealized in 2004 by Ryan Fugger, who developed the first prototype of Ripple as a decentralized digital monetary system (RipplePay). The system went live in 2005 and was meant to provide secure payment solutions within a global network.

In 2012, Fugger handed over the project to Jed McCaleb and Chris Larsen and together they founded the US-based technology company OpenCoin. From that point on, Ripple started to be built as a protocol focused on payment solutions for banks and other financial institutions. In 2013, OpenCoin was rebranded to Ripple Labs, which was later rebranded to Ripple, in 2015.

The XRP Ledger (XRPL)

Based on the work of Fugger and inspired by the creation of Bitcoin, Ripple deployed the Ripple Consensus Ledger (RCL) in 2012 - along with its native cryptocurrency XRP. The RCL was later renamed to XRP Ledger (XRPL).

The XRPL works as a distributed economic system that not only stores all the accounting information of the network participants but also provides exchange services across multiple currency pairs. Ripple presents the XRPL as an open-source distributed ledger that allows for real-time financial transactions. These transactions are secured and verified by the participants of the network through a consensus mechanism. 

Unlike Bitcoin, however, the XRP Ledger is not based on a Proof of Work consensus algorithm and, therefore, does not rely on a process of mining to verify transactions. Instead, the network reaches consensus through the use of its own customized consensus algorithm – formerly known as the Ripple Protocol Consensus Algorithm (RPCA).

The XRPL is managed by a network of independent validating nodes that constantly compare their transaction records. Anyone is able to not only set up and run a Ripple validator node but also to choose which nodes to trust as validators. However, Ripple recommends its clients to use a list of identified, trusted participants to validate their transactions. This list is known as the Unique Node List (UNL).

The UNL nodes exchange transaction data between each other until all of them agree on the current state of the ledger. In other words, transactions that are agreed upon by a supermajority of UNL nodes are considered valid and the consensus is achieved when all these nodes apply the same set of transactions to the ledger.

According to Ripple’s official website, Ripple is a privately held company that founded the development of the XRPL as an open-source distributed ledger. This means that anyone can contribute to the code and that the XRPL is able to continue even if the company ceases to exist.

RippleNet

In contrast to XRPL, the RippleNet is exclusive to the Ripple company and was built on top of the XRPL as a payment and exchange network.

The RippleNet currently offers a 3-product suite that is designed as a payment solution system for banks and other financial institutions. Currently, RippleNet has three major products: xRapid, xCurrent, and xVia.

xRapid

In short, xRapid is an on-demand liquidity solution that uses XRP as a global bridge currency between multiple fiat currencies. Both XRP and xRapid rely on the XRP Ledger, which enables faster confirmation times and much lower fees when compared to conventional methods.

Let’s take a simple example. Bob from Australia wants to send $100 to Alice who is based in India. Bob transfers the money via a financial institution called FIN. In order to perform the transaction, FIN uses the xRapid solution to create a connection with asset exchanges in both the originating and destination country. This way, the company is able to convert Bob’s $100 to XRP, which provides the necessary liquidity for the final payment. In a matter of seconds, the XRP is converted to Indian Rupees and Alice is able to withdraw the money from the asset exchange located in India.

xCurrent

xCurrent is a solution designed to provide instant settlement and tracking of cross-border payments between RippleNet members. Unlike xRapid, the xCurrent solution is not based on the XRP Ledger and does not use the XRP cryptocurrency by default. The xCurrent is built around the Interledger Protocol (ILP), which was designed by Ripple as a protocol for connecting different ledgers or payment networks. 

The four basic components of xCurrent are:

1.     Messenger - The xCurrent messenger provides peer-to-peer communication between connected RippleNet financial institutions. It is used to exchange information regarding risk and compliance, fees, FX rates, payment details and expected time of funds delivery.

2.     Validator - Validator is used to cryptographically confirm the success or failure of a transaction and also to coordinate moving of funds across the Interledger. Financial institutions can run their own validator or can rely on a third-party validator.

3.     ILP Ledger - The Interledger Protocol is implemented into existing banking ledgers, which creates the ILP Ledger. The ILP Ledger functions as a sub-ledger and is used to track credits, debits, and liquidity across transacting parties. Funds are settled atomically, meaning that they are either settled instantly or not at all.

4.     FX Ticker - FX ticker is used to define exchange rates between transacting parties. It tracks the current state of each configured ILP Ledger.

Although xCurrent is primarily designed for fiat currencies, it also supports cryptocurrency transactions.

xVia

xVia is an API-based standardized interface that allows banks and other financial service providers to interact within a single framework - without having to rely on multiple payment network integrations. xVia allow banks to create payments through other banking partners that are connected to RippleNet and also enables them to attach invoices or other information to their transactions.

Closing thoughts

While Bitcoin is known as the first cryptocurrency and Ethereum is recognized for the creation of a platform for smart contracts, we may consider Ripple network as a currency exchange system that focuses on global payment solutions for banks and other financial institutions.

RippleNet may be implemented on top of the existing banking infrastructure as a way to complement and improve the traditional payment system. xCurrent allows for cost-efficient real-time payments across financial institutions, xRapid uses XRP as a bridge borderless currency to provide on-demand liquidity pools, and xVia facilitates the integration and communication of all RippleNet participants.

What Makes a Blockchain Secure?

Blockchains are secured through a variety of mechanisms that include advanced cryptographic techniques and mathematical models of behavior and decision-making. Blockchain technology is the underlying structure of most cryptocurrency systems and is what prevents this kind of digital money from being duplicated or destroyed.

The use of blockchain technology is also being explored in other contexts where data immutability and security are highly valuable. A few examples include the act of recording and tracking charity donations, medical databases, and supply chain management.

However, blockchain security is far from being a simple subject. Therefore, it is important to understand the basic concepts and mechanisms that grant robust protection to these innovative systems.

The concepts of immutability and consensus

Although many features play into the security associated with blockchain, two of the most important are the concepts of consensus and immutability. Consensus refers to the ability of the nodes within a distributed blockchain network to agree on the true state of the network and on the validity of transactions. Typically, the process of achieving consensus is dependent on the so-called consensus algorithms.

Immutability, on the other hand, refers to the ability of blockchains to prevent alteration of transactions that have already been confirmed. Although these transactions are often relating to the transfer of cryptocurrencies, they may also refer to the record of other non-monetary forms of digital data.

Combined, consensus and immutability provide the framework for data security in blockchain networks. While consensus algorithms ensure that the rules of the system are being followed and that all parties involved agree on the current state of the network - immutability guarantees the integrity of data and transaction records after each new block of data is confirmed to be valid.

The role of cryptography in blockchain security

Blockchains rely heavily on cryptography to achieve their data security. In this context, the so-called cryptographic hashing functions are of fundamental importance. Hashing is a process whereby an algorithm (hash function) receives an input of data of any size and returns an output (hash) that contains a predictable and fixed size (or length).

Regardless of the input size, the output will always present the same length. But if the input changes, the output will be completely different. However, if the input doesn’t change, the resulting hash will always be the same - no matter how many times you run the hash function.

Within blockchains, these output values, known as hashes, are used as unique identifiers for data blocks. The hash of each block is generated in relation to the hash of the previous block, and that is what creates a chain of linked blocks. The block hash is dependent on the data contained within that block, meaning that any change made to the data would require a change to the block hash.

Therefore, the hash of each block is generated based on both the data contained within that block and the hash of the previous block. These hash identifiers play a major role in ensuring blockchain security and immutability.

Hashing is also leveraged in the consensus algorithms used to validate transactions. On the Bitcoin blockchain, for example, the Proof of Work (PoW) algorithm utilizes a hash function called SHA-256. As the name implies, SHA-256 takes data input and returns a hash that is 256 bits or 64 characters long.

In addition to providing protection for transaction records on ledgers, cryptography also plays a role in ensuring the security of the wallets used to store units of cryptocurrency. The paired public and private keys that respectively allow users to receive and send payments are created through the use of asymmetric or public-key cryptography. Private keys are used to generate digital signatures for transactions, making it possible to authenticate ownership of the coins that are being sent.

Though the specifics are beyond the scope of this article, the nature of asymmetric cryptography prevents anyone but the private key holder from accessing funds stored in a cryptocurrency wallet, thus keeping those funds safe until the owner decides to spend them (as long as the private key is not shared or compromised).

Cryptoeconomics

In addition to cryptography, a relatively new concept known as cryptoeconomics also plays a role in maintaining the security of blockchain networks. It is related to a field of study known as game theory, which mathematically models decision-making by rational actors in situations with predefined rules and rewards. While traditional game theory can be broadly applied to a range of cases, cryptoeconomics specifically models and describes the behavior of nodes on distributed blockchain systems.

In short, cryptoeconomics is the study of the economics within blockchain protocols and the possible outcomes that their design may present based on its participants’ behavior. Security through cryptoeconomics is based on the notion that blockchain systems provide greater incentives for nodes to act honestly than to adopt malicious or faulty behaviors. Once again, the Proof of Work consensus algorithm used in Bitcoin mining offers a good example of this incentive structure.

When Satoshi Nakamoto created the framework for Bitcoin mining, it was intentionally designed to be a costly and resource-intensive process. Owing to its complexity and computational demands, PoW mining involves a considerable investment of money and time - regardless of where and who the mining node is. Therefore, such a structure provides a strong disincentive for malicious activity and significant incentives for honest mining activity. Dishonest or inefficient nodes will be quickly expelled from the blockchain network, while the honest and efficient miners have the potential of getting substantial block rewards.

Similarly, this balance of risks and rewards also grants protection against potential attacks that could undermine consensus by placing the majority hash rate of a blockchain network into the hands of a single group or entity. Such attacks, known as 51 percent attacks, could be extremely damaging if successfully executed. Due to the competitiveness of Proof of Work mining and the magnitude of the Bitcoin network, the likelihood of a malicious actor gaining control of a majority of nodes is extremely minimal.

Furthermore, the cost in computing power needed to attain 51 percent control of a huge blockchain network would be astronomical, providing an immediate disincentive to make such a large investment for a relatively small potential reward. This fact contributes to a characteristic of blockchains known as Byzantine Fault Tolerance (BFT), which is essentially the ability of a distributed system to continue to work normally even if some nodes become compromised or act maliciously. 

As long as the cost of establishing a majority of malicious nodes remains prohibitive and better incentives exist for honest activity, the system will be able to thrive without significant disruption. It is worth noting, however, that small blockchain networks are certainly susceptible to majority attack because the total hash rate devoted to those systems is considerably lower than the one of Bitcoin.

Closing thoughts

Through the combined use of game theory and cryptography, blockchains are able to attain high levels of security as distributed systems. As with nearly all systems, however, it is critical that these two fields of knowledge are properly applied. A careful balance between decentralization and security is vital to building a reliable and effective cryptocurrency network.

As the uses of blockchain continue to evolve, their security systems will also change in order to meet the needs of different applications. The private blockchains now being developed for business enterprises, for example, rely much more on security through access control than on the game theory mechanisms (or cryptoeconomics) that are indispensable to the safety of most public blockchains.

What Is an ICO (Initial Coin Offering)?

What is an ICO?

An Initial Coin Offering (or ICO) is a method for teams to raise funds for a project in the cryptocurrency space. In an ICO, teams generate blockchain-based tokens to sell to early supporters. This serves as a crowdfunding phase – users receive tokens that they can use (either immediately or in the future), and the project receives money to fund development. 

The practice was popularized in 2014 when it was used to fund the development of Ethereum. Since then, it has been adopted by hundreds of ventures (particularly during the 2017 boom), with varying degrees of success. While the name sounds similar to an Initial Public Offering (IPO), the two are fundamentally very different methods of acquiring funding.

IPOs usually apply to established businesses that sell partial ownership shares in their company as a way to raise funds. In contrast, ICOs are used as a fundraising mechanism that allows companies to raise funds for their project in very early stages. When ICO investors purchase tokens, they are not buying any ownership in the company.

ICOs can be a viable alternative to traditional funding for tech startups. Often, new entrants struggle to secure capital without an already functional product. In the blockchain space, established firms rarely invest in projects on the merits of a white paper. What’s more, a lack of cryptocurrency regulation deters many from considering blockchain startups.

The practice isn’t just used by new startups, though. Established enterprises sometimes choose to launch a reverse ICO, which is functionally very similar to a regular ICO. In this case, a business already has a product or service and issues a token to decentralize its ecosystem. Alternatively, they might host an ICO to include a broader range of investors and raise capital for a new blockchain-based product.

ICOs vs. IEOs (Initial Exchange Offerings)

Initial Coin Offerings and Initial Exchange Offerings are similar in many ways. The key difference is that an IEO is not hosted solely by the project’s team, but alongside a cryptocurrency exchange.

The exchange partners with the team to allow its users to buy tokens directly on its platform. This can be beneficial to all parties involved. When a reputable exchange supports an IEO, users can expect the project to have been rigorously audited. The team behind the IEO benefits from increased exposure, and the exchange stands to gain from the project’s success.

ICOs vs. STOs (Security Token Offerings)

Security Token Offerings were once branded the “new ICOs.” From a technological standpoint, they’re identical – tokens are created and distributed in the same manner. On the legal side, however, they’re completely different.

Due to some legal ambiguity, there is no consensus on how regulators should qualify ICOs (discussed in more detail below). As a result, the industry has yet to see any meaningful regulation.

Some companies decide to take the STO route as a way to offer equity in the form of tokens. Also, this could help them steer clear of any uncertainty. The issuer registers their offering as a securities offering with the relevant government body, which subjects them to the same treatment as traditional securities.

How does an ICO work?

An ICO can take many forms. Sometimes, the team hosting it will have a functional blockchain that they’ll continue to develop in the coming months and years. In this case, users can buy tokens that are sent to their addresses on the chain. 

Alternatively, the blockchain might not have launched, in which case the tokens will be issued on an established one (such as Ethereum). Once the new chain is live, holders can swap their tokens for fresh ones issued on top of it.

The most common practice, however, is to issue tokens on a smart-contract-capable chain. Again, this is done predominantly on Ethereum – many applications use the ERC-20 token standard. Though not all originate from ICOs, it’s estimated that there are upwards of 200,000 different Ethereum tokens today.

Besides Ethereum, there are other other chains that can be used – Waves, NEO, NEM, or Stellar are some popular examples. Given how flexible these protocols are, many organizations make no plans to migrate away but instead opt to build on existing foundations. This approach allows them to tap into the network effects of an established ecosystem and gives developers access to tools that have already been tried and tested.

An ICO is announced ahead of time and specifies rules for how it will be run. It might outline a timeframe it will operate for, implement a hard cap for the number of tokens to be sold, or combine both. There might also be a whitelist that participants must sign up to beforehand. 

Users then send funds to a specified address – generally, Bitcoin and Ethereum are accepted due to their popularity. Buyers either provide a new address to receive tokens, or tokens are automatically sent to the address that the payment was made from.

Who can launch an ICO?

The technology to create and distribute tokens is widely accessible. But in practice, there are many legal considerations to take into account before holding an ICO. 

Overall, the cryptocurrency space is lacking in regulatory guidelines, and some crucial questions are yet to be answered. Some countries prohibit launching ICOs outright, but even the most crypto-friendly jurisdictions have yet to deliver clear legislation. It’s therefore imperative that you understand your own country’s laws before considering an ICO.

What are the regulations surrounding ICOs?

It’s difficult to give a one-size-fits-all answer because there are so many variables to consider. Regulations vary from jurisdiction to jurisdiction, and each project likely has its own nuances that may affect how government entities view it. 

It should be noted that the absence of regulation in some places is not a free pass to crowdfund a project via an ICO. So it’s important to seek professional legal advice before choosing this form of crowdfunding. 

On a number of occasions, regulators have sanctioned teams that raised funds in what they later deemed to be securities offerings. If authorities find a token to be a security, the issuer must comply with rigorous measures that apply to traditional assets in this class. On this front, the US’s Securities and Exchange Commission (SEC) has provided some good insights.

In general, the development of regulation is slow in the blockchain space, particularly as the tech outpaces the slow-turning wheels of the legal system. Still, numerous government entities have been discussing the implementation of a more transparent framework for blockchain technology and cryptocurrencies.

Though many blockchain enthusiasts are wary of possible government overreach (which might hamper development), most of them recognize the need for investor protection. Unlike traditional financial classes, the ability for anyone around the globe to participate presents some significant challenges.

What are the risks with ICOs?

The prospect of a new token granting huge returns is an appealing one. But not all coins are created equal. As with any cryptocurrency investment, there are no guarantees that you’ll have a positive return on investment (ROI).

It’s difficult to determine whether a project is viable, as there are many factors to assess. Prospective investors should perform due diligence and conduct extensive research into tokens they’re considering. This process should include a thorough fundamental analysis. Below is a list of some questions to ask, but it is by no means exhaustive:

·       Is the concept viable? What problem does it solve?

·       How is the supply allocated?

·       Does the project need a blockchain/token, or can it be done without one?

·       Is the team reputable? Do they have the skills to bring the project to life?

The most important rule is never to invest more than you can afford to lose. The cryptocurrency markets are incredibly volatile, and there’s a major risk that your holdings will plummet in value.

Closing thoughts

Initial Coin Offerings have been tremendously effective as a means for projects in their early stages to acquire funding. Following the success of Ethereum’s Initial Coin Offering in 2014, many organizations were able to acquire capital to develop new protocols and ecosystems.

Buyers should, however, be conscious of what they’re investing in. There are no guaranteed returns. Given the nascency of the cryptocurrency space, such investments are highly risky, and there’s little by way of protection if the project fails to deliver a viable product.

What Is a Digital Signature?

A digital signature is a cryptographic mechanism used to verify the authenticity and integrity of digital data. We may consider it as a digital version of the ordinary handwritten signatures, but with higher levels of complexity and security.

In simple terms, we may describe a digital signature as a code that is attached to a message or document. After generated, the code acts as proof that the message hasn’t been tampered with along its way from sender to receiver.

Although the concept of securing communications using cryptography dates back to ancient times, digital signature schemes became a possible reality in the 1970s - thanks to the development of Public-Key Cryptography (PKC). So, to learn how digital signatures work, we need to first understand the basics of hash functions and public-key cryptography.

Hash functions

Hashing is one of the core elements of a digital signature system. The process of hashing involves transforming data of any size into a fixed-size output. This is done by a special kind of algorithms known as hash functions. The output generated by a hash function is known as a hash value or message digest.

When combined with cryptography, the so-called cryptographic hash functions can be used to generate a hash value (digest) that acts as a unique digital fingerprint. This means that any change in the input data (message) would result in a completely different output (hash value). And that’s the reason cryptographic hash functions are widely used for verifying the authenticity of digital data.

Public-key cryptography (PKC)

Public-key cryptography, or PKC, refers to a cryptographic system that makes use of a pair of keys: one public key and one private key. The two keys are mathematically related and can be used for both data encryption and digital signatures.

As an encryption tool, PKC is more secure than the more rudimentary methods of symmetric encryption. While older systems rely on the same key to encrypt and decrypt information, PKC allows for data encryption with the public key and data decryption with its corresponding private key.

Other than that, the PKC scheme may also be applied in the generation of digital signatures. In essence, the process consists of hashing a message (or digital data) along with the signer’s private key. Next, the recipient of the message can check if the signature is valid by using the public key provided by the signer.

In some situations, digital signatures may involve encryption, but that isn’t always the case. For instance, the Bitcoin blockchain makes use of PKC and digital signatures, but unlike many tend to believe, there is no encryption in the process. Technically, Bitcoin deploys the so-called Elliptic Curve Digital Signature Algorithm (ECDSA) to authenticate transactions.

How digital signatures work

In the context of cryptocurrencies, a digital signature system often consists of three basic steps: hashing, signing, and verifying.

Hashing the data

The first step is to hash the message or digital data. This is done by submitting the data through a hashing algorithm so that a hash value is generated (i.e., the message digest). As mentioned, the messages can vary significantly in size, but when they are hashed, all their hash values have the same length. This is the most basic property of a hash function.

However, hashing the data is not a must for producing a digital signature because one can use a private key to sign a message that wasn’t hashed at all. But for cryptocurrencies, the data is always hashed because dealing with fixed-length digests facilitates the whole process.

Signing

After the information is hashed, the sender of the message needs to sign it. This is the moment where public-key cryptography comes into play. There are several types of digital signature algorithms, each with its own particular mechanism. But essentially, the hashed message will be signed with a private key, and the receiver of the message can then check its validity by using the corresponding public key (provided by the signer).

Put in another way, if the private key is not included when the signature is generated, the receiver of the message won’t be able to use the corresponding public key to verify its validity. Both public and private keys are generated by the sender of the message, but only the public key is shared with the receiver.

It’s worth noting that digital signatures are directly related to the content of each message. So unlike handwritten signatures, that tend to be the same regardless of the message, each digitally signed message will have a different digital signature.

Verifying

Let’s take an example to illustrate the whole process until the final step of verification. Imagine that Alice writes a message to Bob, hashes it, and then combines the hash value with her private key to generate a digital signature. The signature will work as a unique digital fingerprint of that particular message.

When Bob receives the message, he can check the validity of the digital signature by using the public key provided by Alice. This way, Bob can be sure that the signature was created by Alice because only she has the private key that corresponds to that public key (at least that’s what we expect).

So, it’s crucial for Alice to keep her private key in secret. If another person gets their hands on Alice’s private key, they can create digital signatures and pretend to be Alice. In the context of Bitcoin, this means someone could use Alice’s private key to move or spend her Bitcoins without her permission.

Why are digital signatures important?

Digital signatures are often used to achieve three results: data integrity, authentication, and non-repudiation.

·       Data integrity. Bob can verify that Alice’s message wasn’t changed along its way. Any modification in the message would produce a completely different signature.

·       Authenticity. As long as Alice’s private key is kept in secret, Bob can use her public key to confirm that the digital signatures were created by Alice and no one else.

·       Non-repudiation. Once the signature has been generated, Alice won’t be able to deny having signed it in the future, unless her private key gets somehow compromised.

Use cases

Digital signatures can be applied to various kinds of digital documents and certificates. As such, they have several applications. Some of the most common use cases include:  

·       Information Technology. To enhance the security of Internet communication systems.

·       Finance. Digital signatures can be implemented to audits, expense reports, loan agreements, and much more.

·       Legal. Digital signing of all sorts of business contracts and legal agreements, including governmental papers.

·       Healthcare. Digital signatures can prevent fraud of prescriptions and medical records.

·       Blockchain. Digital signature schemes ensure that only the rightful owners of the cryptocurrencies are able to sign a transaction to move the funds (as long as their private keys aren’t compromised).

Limitations

The major challenges faced by digital signature schemes rely on at least three requirements: 

·       Algorithm. The quality of the algorithms used in a digital signature scheme is important. This includes the choice of reliable hash functions and cryptographic systems.

·       Implementation. If the algorithms are good, but the implementation is not, the digital signature system will likely present flaws.

·       Private Key. If the private keys get leaked or somehow compromised, the properties of authenticity and non-repudiation will be invalidated. For cryptocurrency users, losing a private key may result in significant financial losses.

Electronic signatures vs. digital signatures

Simply put, digital signatures relate to one particular kind of electronic signatures - which refer to any electronic method of signing documents and messages. Thus, all digital signatures are electronic signatures, but the opposite isn’t always true.

The main difference between them is the authentication method. Digital signatures deploy cryptographic systems, such as hash functions, public-key cryptography, and encryption techniques.

Closing thoughts

Hash functions and public-key cryptography are at the core of digital signature systems, which are now applied to a wide range of use cases. If properly implemented, digital signatures can increase security, ensure integrity, and facilitate the authentication of all kinds of digital data.

In the blockchain realm, digital signatures are used to sign and authorize cryptocurrency transactions. They are particularly important for Bitcoin because the signatures ensure that coins can only be spent by the individuals that possess the corresponding private keys.

Although we’ve been using both electronic and digital signatures for years, there is still a lot of room for growth. A great portion of today’s bureaucracy is still based on paperwork, but we will likely see more adoption of digital signature schemes as we migrate to a more digitalized system.