August 5, 2021

The Keys to Crypto Kingdom: Wallet Addresses, Public and Private Keys Explained

If you want to send or receive crypto currencies and create a crypto wallet, you will be confronted with the concepts public key, private key, secret phrase and wallet addresses. 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 a simple, 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 “symmetric encryption”. 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 key is a big, random prime number and can be used as unique ID specific to a party to encrypt, decrypt or sign a 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 a unique pair of public and private keys. There is a one-way-relationship between 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 is impossible to derive the private key through a public key. These key pairs allow to share the public key which can be used by others to encrypt or verify information. This is what so-called asymmetric cryptography is 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 wallet similar to what an ATM PIN or Online Banking TAN is to a bank account. Every wallet has one or multiple unique private keys. 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 must keep your private key secure at all times because other people could use it to access and send (steal!) your funds.  

Because the private key would be a super-complicated random number 256-bit-number, that is impossible to remember and note, the idea of the secret phrase was invented. 

What is a secret phrase? 

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).  

secret phrase is 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 wallet as a secret phrase is a representation of the random number your private key is. 

An example of a 12 word secret phrase could be the following 

donkey pony lizard comfort house frame ignore push glass cheap mouse secret 

Wallet providers will instruct users to note the generated secret phrase on a piece of paper and store it securely, out of reach for any third person. If any other person gets access to your secret phrase, they could steal all your crypto funds stored in that wallet! 

What is a public key? 

The public key of a crypto wallet 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 account number/IBAN. The wallet address can be shared with another person and is used to receive 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. 

Source: bitcoinbook/ch04.asciidoc at develop · bitcoinbook/bitcoinbook (github.com)   

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 final part of 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 can enter 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 sometimes even special symbols.  

For example, the first Bitcoin address ever created was 

 1A1zP1eP5QGefi2DMPTfTL5SLmv7DivfNa 

The wallet address 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 allow external 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 per KYC/AML regulations, exchanges have to determine the user’s identity and postal address, an exchange wallet address can therefore be connected with a user’s identity (but only the exchange can see this information).  

How they all work together 

Now that we have explained private key, public key, secret phrase 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 a private key when 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 a secret phrase and store it safely on a piece of paper. You use it if you ever have to restore your crypto wallet funds after losing the private key.  
  • The public key is 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 your wallet address to 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. 
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