Digital Signatures in Crypto: How They Secure Transactions and Verify Ownership

Introduction

In cryptocurrency transactions, when a user carries out a Bitcoin or any other crypto transaction, the network nodes must verify its authenticity before recording it on the blockchain. 

These nodes ensure that the transaction hasn’t been altered or compromised by a third party during the transmission and that it was genuinely sent by the rightful owner. But how do they confirm this? That’s where digital signatures come into play.

What is a Digital Signature in Cryptocurrency

Digital signature is a cryptographic tool that is used to prove the authenticity and integrity of the transaction. In the crypto world, the digital signature is used to prove that the owner of a specific amount of cryptocurrency has authorized a transaction to transfer it to someone else.

A simple analogy to understand is a handwritten signature on a bank cheque. When you sign a cheque, you are authorizing the bank to transfer a specific amount of money to someone else's account. The bank verifies your signature to ensure that the request is legitimate and has not been forged.

Similarly, a digital signature authorizes the blockchain network to transfer crypto from your crypto wallet to someone else crypto wallet and record it as a legit transaction in the blockchain. 

The nodes in the blockchain use the digital signature to confirm the transaction is genuine, directly came from you (private key holder), not altered and securely record it in the blockchain. Once the transaction is recorded in the blockchain, then only your wallet balance will get updated. 

Why Digital Signatures Are Mandatory in the Crypto space

Authentication - Proves Who Signed the Transaction

If Bob sends 10 Bitcoins to Charlie, the blockchain network will use the digital signature to verify that the transaction is actually authorized by Bob and no one else. 

If digital signatures were not used, anyone could create a fake transaction and steal money from Bob’s crypto wallet since the blockchain would have no way to verify if the transaction truly came from him. 

A good analogy is a bank cheque, which requires a signature to verify its authenticity. If bank cheques required no signatures, anyone could write a cheque in someone else’s name and withdraw money from their account. 

Integrity - Prevents Transaction Tampering

Have you noticed that your bank asks for your signature exactly on the spot that you corrected a mistake in your withdrawal or deposit slips? This is done to protect the integrity of the transaction.

In the digital world, Digital signatures ensure that a transaction cannot be modified or tampered with after it is signed.  Once a transaction is signed by a user, a digital signature will be created which is unique to that transaction protecting the integrity of the transaction 100%.

Even if a hacker manages to intercept the transaction while it's being broadcast to the network (for example, through a man-in-the-middle attack), any attempt to modify the transaction (such as changing a recipient or amount) would invalidate the digital signature, as a result the blockchain network will reject the transaction once it identifies this.

Non-Repudiation – Prevents the Sender from Denying It Later

A digital signature acts as a cryptographic proof that the transaction was authorized by the sender and no one else. 

For example, if Bob sends 10 bitcoins to Alice, he cannot later claim that he didn't send 10 Bitcoins to Alice.

However, if someone gains access to Bob’s crypto wallet and initiates a transaction to send 10 bitcoins to themselves, the transaction will still generate a valid digital signature.

This is because the transaction is signed using Bob's private key, which the hacker has now compromised. The blockchain will record the transaction and update Bob's wallet balance accordingly.

Why? Because protecting our crypto wallets is our responsibility, the job of the blockchain network is to verify the accuracy of the digital signature and validate the transaction.

Getting access to someone's crypto wallet is like getting a hold of someone's already signed empty cheque book!

How Digital Signature is Created

A digital signature in the crypto space is created using a private key. The main purpose of creating a digital signature is to verify the sender; otherwise, anyone could create fake transactions and steal cryptocurrencies belonging to someone else.

Let's take a scenario and see how a digital signature is created using a private key, we are not going very deep into technical details because creating a digital signature is an extremely mathematical process. Just try to get the idea!

Scenario: Bob wants to send 5 Bitcoins to his friend Charlie. Bob got Charlie’s public address to send the bitcoins. This is how a digital signature would be created behind the scenes.

Step 1: Generate the Transaction data

The transactions data will be collected, such as 

• The sender’s Public Key (or address derived from the public key).
• The recipient’s public key (or address).
• The amount of cryptocurrency to be transferred.
• A timestamp or other metadata.
• A reference to previous transactions (inputs) to prove ownership of the funds.

Transaction Data = {
  Sender: Bob’s Public Key,
  Recipient: Charlie's Public Key,
  Amount: 5 BTC,
  Timestamp: 2025-10-01T12:00:00Z,
  Inputs: [Reference to previous transactions]
}

Step 2: Hash the Transaction Data

Transaction data mentioned above is hashed using a cryptographic function, in the case of bitcoin the hashing algorithm used is SHA-256. The output would be 256-bit value for SHA-256.

The above hash exactly represents the transaction data, if one of the data is changed, then the hash will change.

Step 3: Sign the Hash with the Private Key

The sender uses their private key to sign the hash of the transaction. This step involves applying a cryptographic algorithm (e.g., ECDSA - Elliptic Curve Digital Signature Algorithm) to the hash.

Basically, this means the hash that got generated using the transaction data is now getting encrypted or locked by creating a digital signature using the private key. The digital signature can only be unlocked using the public key associated with the signed private key.

Step 4: Attach the Signature to the Transaction

The digital signature is attached to the transaction data, along with the sender’s Public Key. This allows anyone to verify the signature using the sender’s public key.

Final Transaction structure read to be broadcasted to the network look like this:

Transaction = {
Transaction Data,
Digital Signature
Sender's Public Key
}

Step 5: Broadcast the Transaction

The transaction will then be broadcasted to the network, the network nodes will then:

Extract the Transaction Data: Nodes read the plaintext transaction details (sender, recipient, amount, etc.).

Hash the Transaction Data: Nodes hash the transaction data using the same cryptographic hash function (e.g., SHA-256).

Verify the Signature: Nodes use the sender’s public key to decrypt or unlock the digital signature and recover the hash of the transaction data.

Compare the Hashes: Nodes compare the hash they computed from the transaction data with the hash recovered from the signature. If they match, the transaction is valid.

Simple Diagram Showing How Digital Signature Work in Crypto

Key Facts About Digital Signatures in Crypto Transactions

✅ No one can find the private key by using the Digital signature, it is important to keep in mind that while the private key is used to create the signature, the private key is never revealed. If the private key was revealed, then anyone can use the private key to steal crypto from others!

✅The public key does not decrypt or unlock the digital signature. Instead, it is used to perform mathematical calculations (e.g., elliptic curve operations in ECDSA) to verify the signature's authenticity. During verification, the public key, along with the signature, helps recover the original hash of the transaction data. 

✅Digital signatures in crypto do not hide transaction details by encrypting them. In public blockchains like Bitcoin and Ethereum, all transactions are visible to everyone. However, all crypto blockchains use Digital Signature to verify sender's identity.

Even though transactions on a public blockchain are visible, they still offer some anonymity. This is because the sender’s real name or identity is not shown, only their public address appears. Since these addresses are just random-looking characters, no one knows who they belong to unless the owner shares them.

For example, if Bob sends 3 BTC to Alice, the Bitcoin blockchain will record it as:

📌Address ty4789bhf989595hbnt050 sent 3 BTC to hdj4893mj9kabndm4 at a specific time.

From this, ordinary people cannot tell who owns these addresses unless the owner reveals them.

The main purpose of a digital signature is to prove that a transaction was really sent by the owner and to prevent fraud. Without digital signatures, someone could fake transactions and steal funds by pretending to be someone else.

Final Thoughts

Digital signatures play a crucial role in crypto transactions by ensuring security and authenticity. They prevent fraud by proving that a transaction was genuinely sent by the owner and has not been altered. 

While transactions on public blockchains are visible, digital signatures help protect users from identity theft and unauthorized access. In short, they make crypto transactions safe, trustworthy, and tamper-proof. 

Disclaimer: The contents of this article are for informational purposes only and are not financial advice. The views here are just the author’s opinions. The crypto market is volatile, so be sure to do your own research before investing.