Let's return to our fictional village with its six inhabitants. The central bank from the article "Why Bitcoin?" failed to gain traction, disappeared, and was replaced by Bitcoin.

But how do we ensure that everyone doesn't simply use someone else's wallet with our digital money? Since Bitcoin balances are only recorded at addresses, without protection it would be easy for the farmer to simply use the cinema owner's address to pay for his drinks.

This is where cryptography comes in.

Each villager possesses a key pair:

  1. The public key: It is visible to everyone and functions like an account number or a mailbox.
  2. The private key: It is strictly secret and intended only for the owner. It is the only key that can open the wallet to "sign" a transaction.

Behind this digital signature lies a mathematical process called ECDSA (Elliptic Curve Digital Signature Algorithm). This mathematical process can be thought of as an unforgeable digital signature. It allows the farmer to prove his identity while his private key remains securely locked away. The underlying mathematics ensures that everyone in the village can verify its authenticity without knowing the secret behind it.

The village cash book and the unbreakable seal

But a digital signature isn't enough. We also have to prevent subsequent manipulation. Since no physical money changes hands anymore, every transaction is recorded in the village cash book. Every villager has such a cash book, and it is updated every few minutes in case someone has made a transaction. To prevent cheating, each page is secured with the SHA256 algorithm. This transforms all the information on the page into a digital fingerprint (a hash value).

If the beverage manufacturer were to try to change even a small detail -for example, crediting themselves with 10 Bitcoins instead of 5 - the entire hash value would change immediately. The seal would be broken, and the whole village would instantly notice the fraud.

Since each new page contains the hash value of the previous page, a virtually immutable chain is created. If the hash value of the previous page changes, the hash value of the current page must also change. Thus, an error occurs. In this way, the history of our money is documented securely and immutably forever.

Security in today's monetary system

Currencies like the euro or the US dollar are not secured by mathematics, but by institutions. Cash is physical and can be stolen. Electronic money, on the other hand, is held in bank accounts under central administration. Security there relies solely on authentication methods designed to prevent unauthorized access. However, as numerous fraud cases in the past have shown, these systems are vulnerable to human error, phishing, or technical vulnerabilities. Unlike Bitcoin's cryptographic strength, the security of our everyday money ultimately relies on trust in third parties, not on the immutable laws of mathematics.

In conclusion

For our new digital village currency, Bitcoin, we need two cryptographic methods to use it securely:

  • ECDSA to prove ownership beyond doubt (your digital key)
  • SHA-256 to keep our village ledger tamper-proof (your unbreakable seal).

Thanks to this mathematics, our money is now more secure than in any safe in the world. The effort required for manipulation is so incredibly high that thieves in our village no longer stand a chance.

Best regards,

your beekeeper, Patrick