How does a digital signature function in electronic transactions?

A digital signature is a crucial component in electronic transactions as it provides a means to verify both the sender's identity and the integrity of the message being sent. It works through cryptographic methods that generate a unique code based on the content of the message and the sender’s private key. When a recipient receives a signed message, they can use the sender's public key to confirm that the signature matches. This verification process ensures that the message was indeed sent by the purported sender and that it hasn't been altered during transmission.

In the context of electronic transactions, such security measures are essential to establish trust between parties. When a digital signature is present, it assures the recipient that the document has not been tampered with, which is crucial for the authenticity and reliability of the transaction.

The other options do not accurately reflect the function of a digital signature. While encryption may be used for data security, it is not the primary function of a digital signature. Similarly, physical authentication methods relate to verifying identities through physical means, while digital signatures operate in a digital space. Lastly, while digital signatures enhance security, they do not replace the need for passwords, which serve a different function in user authentication.