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Bitcoin wallets are encrypted.”

“They tried to outlaw encryption back in the 1990s.”

“Websites with that little green lock icon use SSL encryption.”

Definition(s) from the Web

  1. In the original Bitcoin client, wallet encryption uses AES-256-CBC to encrypt only the private keys that are held in a wallet. The keys are encrypted with a master key which is entirely random. This master key is then encrypted with AES-256-CBC with a key derived from the passphrase using SHA-512 and OpenSSL’s EVP_BytesToKey and a dynamic number of rounds determined by the speed of the machine which does the initial encryption (and is updated based on the speed of a computer which does a subsequent passphrase change). Although the underlying code supports multiple encrypted copies of the same master key (and thus multiple passphrases) the client does not yet have a method to add additional passphrases.

    At runtime, the client loads the wallet as it normally would, however the keystore stores the keys in encrypted form. When the passphrase is required (to top up keypool or send coins) it will either be queried by a GUI prompt, or must first be entered with the walletpassphrase RPC command. This will change the wallet to “unlocked” state where the unencrypted master key is stored in memory (in the case of GUI, only for long enough to complete the requested operation, in RPC, for as long as is specified by the second parameter to walletpassphrase). The wallet is then locked (or can be manually locked using the walletlock RPC command) and the unencrypted master key is removed from memory. Source
  2. In cryptography, encryption is the process of encoding information. This process converts the original representation of the information, known as plaintext, into an alternative form known as ciphertext. Ideally, only authorized parties can decipher a ciphertext back to plaintext and access the original information. Encryption does not itself prevent interference but denies the intelligible content to a would-be interceptor.

    For technical reasons, an encryption scheme usually uses a pseudo-random encryption key generated by an algorithm. It is possible to decrypt the message without possessing the key but, for a well-designed encryption scheme, considerable computational resources and skills are required. An authorized recipient can easily decrypt the message with the key provided by the originator to recipients but not to unauthorized users.

    Historically, various forms of encryption have been used to aid in cryptography. Early encryption techniques were often utilized in military messaging. Since then, new techniques have emerged and become commonplace in all areas of modern computing. Modern encryption schemes utilize the concepts of public-key and symmetric-key. Modern encryption techniques ensure security because modern computers are inefficient at cracking the encryption. Source

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