What Is a Private Key?
A private key is a secret number that is used in cryptography, similar to a password. In cryptocurrency, private keys are also used to sign transactions and prove ownership of a blockchain address.
A private key is an integral aspect of bitcoin and altcoins, and its security makeup helps to protect a user from theft and unauthorized access to funds.
KEY TAKEAWAYS
- A private key is a secret number that is used in cryptography and cryptocurrency.
- A private key is a large, randomly-generated number with hundreds of digits. For simplicity, they are usually represented as strings of alphanumeric characters.
- A cryptocurrency wallet consists of a set of public addresses and private keys. Anyone can deposit cryptocurrency in a public address, but funds cannot be removed from an address without the corresponding private key.
- Private keys represent final control and ownership of cryptocurrency. It is vitally important to prevent one's private keys from being lost or compromised.
Understanding Private Keys
Cryptocurrency is controlled through a set of digital keys and addresses, representing ownership and control of virtual tokens. Anyone can deposit bitcoin or other tokens in any public address. But even though a user has tokens deposited into their address, they won’t be able to withdraw them without the unique private key.
Private keys can take a few different forms. In ordinary, base-ten notation, a private key would be hundreds of digits long–so long that it would take years to crack a private key by brute force. For simplicity, private keys are usually expressed as a string of alphanumeric characters.
The public key is created from the private key through a complicated mathematical algorithm. However, it is near impossible to reverse the process by generating a private key from a public key. A similar algorithm is then used to create a receiving address from the public key. Think of the address as a mailbox, and the private key as the key to the box.
The mail carrier, and anyone really, can insert letters and small packages through the opening in the mailbox. However, the only person that can retrieve the contents of the mailbox is the one who has the unique key. It is, therefore, important to keep the key safe because if it is stolen or lost, the mailbox can be compromised.
Digital Wallets
While private keys are essential to cryptocurrency, it is not necessary for a user to create or remember their own key pairs. Digital wallets are used to automatically create key pairs and store them safely. When a transaction is initiated, the wallet software creates a digital signature by processing the transaction with the private key. This upholds a secure system since the only way to generate a valid signature for any given transaction is to use the private key.
The signature is used to confirm that a transaction has come from a particular user, and ensures that the transaction cannot be changed once broadcasted. If the transaction gets altered, even slightly, the signature will be incorrect.
If a user loses their private key, they can no longer access the wallet to spend, withdraw, or transfer coins. It is, therefore, imperative to save the private key in a secure location. There are a number of ways that a digital wallet that contains a private key can be stored. Private keys can be stored on paper wallets, which are documents that have been printed with the private key and QR code on them so that they can easily be scanned when a transaction needs to be signed.
The private keys can also be stored using a hardware wallet that uses smartcards or USB devices to generate and secure private keys offline. An offline software wallet could also be used to store private keys. This wallet has an offline partition for private keys and an online division that has the public keys stored. With an offline software wallet, a new transaction is moved offline to be signed digitally and then moved back online to be broadcasted to the cryptocurrency network.
These types of storage mentioned above are called cold storage, as private keys are stored offline. The other type of wallet, hot wallet, stores private keys on devices or systems that are connected to the internet. Examples of these wallets include desktop wallets (e.g., Electrum), mobile wallets (e.g., Coinstats), and web-based wallets (e.g., Coinbase).
How Do Private Keys Work?
A private key is an extremely large number that is used in cryptography, similar to a password. Private keys are used to create digital signatures that can easily be verified, without revealing the private key. Private keys are also used in cryptocurrency transactions in order to show ownership of a blockchain address.
What Is the Best Way to Store Private Keys?
Private keys can be stored on computers or mobile phones, USB drives, a specialized hardware wallet, or even a piece of paper. The ideal form of storage will depend on how often you plan to use your cryptocurrency. A password-protected mobile phone or computer is the most convenient way to store cryptocurrency for everyday use. For long-term or "cold" storage, private keys should always be kept offline, ideally on devices that have never touched the internet. Even printers can be compromised. Hardware wallets can facilitate cold storage by signing transactions in a way that does not compromise the private keys.
Should You Trust a Custodial Wallet?
A custodial wallet is a third-party service that allows users to store cryptocurrency, similar to a bank. This allows users to skip over the complication of private key storage, relying instead on the technological expertise of the company offering the service. However, there are tradeoffs. Custodial wallets are often targets for hackers or phishing scams, and they can also be seized or frozen by legal authorities. The best solution is to determine what type of wallet fits your individual risk tolerance and technological skill.
