How Do Digital Signatures Work?

In the realm of financial technologies, especially cryptocurrencies, a digital signature system typically involves three fundamental steps: Hashing, Signing, and Verifying.

1. Hashing the Data

   The initial step involves hashing the message or digital data. This process entails passing the data through a hashing algorithm, creating a hashed value (message digest). While messages can vastly differ in size, their resulting hashes will have the same length. This property facilitates data handling. While hashing data isn't essential for creating a digital signature (as a private key can sign a message without hashing it), for cryptocurrencies, data hashing is routine due to dealing with fixed-length data, streamlining the entire process.

2. Signing

   After hashing the information, the sender performs the signing process. This step involves encrypting the hash using their private key. Various cryptographic algorithms exist for digital signatures, each with its unique process. The signed hash can then be verified by the recipient using the corresponding public key, ensuring the message's integrity and origin. If the private key isn't included during signing, the recipient won't be able to verify its authenticity using the public key. Both public and private keys are created by the message sender, but only the public key is shared with the message recipient.

   It's crucial to note that digital signatures are fundamentally tied to the content of each message. Unlike our traditional signatures, which remain consistent regardless of the message, digitally signed messages have a unique digital signature for each character. Hence, the digital signature differs for each message.

3. Verifying

   For a simpler understanding, consider Alice writing a message to Bob. After hashing and signing, the digital signature acts as a unique digital fingerprint for that specific message. When Bob receives the message, he can verify the digital signature's authenticity using the public key provided by Alice. This way, Bob can be certain that Alice is the signer, as only she has the private key corresponding to that public key (or at least, that's what is expected).

   It's crucial for Alice to safeguard her private key in a secure location. If a third party gains access to Alice's private key, they could create digital signatures and pretend to be Alice to deceive Bob—an impersonation of her identity. In the context of Bitcoin, this means that anyone with Alice's private key can transfer or spend her bitcoins without her consent.