Process of encoding information such that decoding requires the knowledge of some secret (a key). This tag covers questions about obfuscated and encrypted programs, or tools, but higher level questions may get better answers on Cryptography Stack Exchange.
In cryptography, encryption is the process of transforming information (referred to as plaintext) using an algorithm (called cipher) to make it unreadable to anyone except those possessing special knowledge, usually referred to as a key. The result of the process is encrypted information (in cryptography, referred to as ciphertext). In many contexts, the word encryption also implicitly refers to the reverse process, decryption (e.g. “software for encryption” can typically also perform decryption), to make the encrypted information readable again (i.e. to make it unencrypted).
Encryption may commonly be confused with obfuscation, since both revolve around concealing the original code.
Encryption has long been used by militaries and governments to facilitate secret communication. Encryption is now commonly used in protecting information within many kinds of civilian systems. It can be used to protect data "at rest", such as files on computers and storage devices (e.g. USB flash drives). In recent years there have been numerous reports of confidential data such as customers' personal records being exposed through loss or theft of laptops or backup drives. Encrypting such files at rest helps protect them should physical security measures fail. Digital rights management systems which prevent unauthorized use or reproduction of copyrighted material and protect software against reverse engineering (see also copy protection) are another somewhat different example of using encryption on data at rest.
Encryption is also used to protect data in transit, for example data being transferred via networks (e.g. the Internet, e-commerce), mobile telephones, wireless microphones, wireless intercom systems, Bluetooth devices and bank automatic teller machines. There have been numerous reports of data in transit being intercepted in recent years. Encrypting data in transit also helps to secure it as it is often difficult to physically secure all access to networks.
Encryption, by itself, can protect the confidentiality of messages, but other techniques are still needed to protect the integrity and authenticity of a message; for example, verification of a message authentication code (MAC) or a digital signature. Standards and cryptographic software and hardware to perform encryption are widely available, but successfully using encryption to ensure security may be a challenging problem. A single slip-up in system design or execution can allow successful attacks. Sometimes an adversary can obtain unencrypted information without directly undoing the encryption. See, e.g., traffic analysis, TEMPEST, or Trojan horse.
One of the earliest public key encryption applications was called Pretty Good Privacy (PGP). It was written in 1991 by Phil Zimmermann and was purchased by Network Associates (now PGP Corporation) in 1997.
A tip: conceptual questions about encryption might get more attention and better answers from our sister site Cryptography Stack Exchange.