OTP code: what it is, how it works and why it is secure

The OTP code is a disposable password generated randomly, which is used together with another password in two-factor authentication to increase the security of online services.

The OTP can appear on a display that updates regularly, or it can be shared with the user via SMS, email, or dedicated apps. In any case, the OTP code can be used for a single operation, after which it becomes unusable.

What is the OTP code?

The OTP (one-time password) is a one-use password that can be used to access IT platforms, verify one’s identity, and authorize various online operations — from registering a new account to executing a bank transfer via home banking.

Also known as OTAC (one-time authorization code), the OTP code is a random combination of numbers that overcomes the limitations of “static” passwords, which are traditionally exposed to different kinds of cyberattacks.

The OTP code is often used together with another password as a fundamental component of so-called Two-Factor Authentication (2FA). The most classic example is accessing an online service where, after entering username and password, the user must also enter an OTP received via SMS, email, or an app on their smartphone.

The OTP, which can be used only once and often has a limited validity period, ensures that the operation is performed by the person who possesses a certain device (the physical token or the smartphone where the OTP is received) or who knows certain information, such as a PIN code.

How does the OTP code work?

To be secure, the OTP code must be impossible to guess or deduce, which is why it is always a random, generally numerical sequence communicated through secure channels such as SMS or tokens.

But how is a one-time code generated? In simple terms, the OTP code is the “summary” of a longer series of calculations based essentially on two input data: the first is always a secret key shared between the server and the user (login credentials, a PIN code, etc.), while the second may vary.

OTP generation algorithms can be based on the previous password, on synchronization between the authentication server and the user’s device (and therefore on time), or simply on a random number.

In any case, one-time passwords are the result of complex, non-reversible algorithms — meaning that it is impossible to reconstruct the original input from the output. When we use an OTP code to confirm an operation or to access a service requiring two-factor authentication, we add an extra layer of security, thanks to two key elements: the randomness of the result and the complexity of the calculations needed to obtain it.

TOTP and HOTP: what they are and differences

As mentioned, the OTP is generated from two input data: a shared secret key and a second, variable factor. This second factor may be based on the time synchronization of two devices, on a counter that tracks the number of iterations, or on a random value generated in various ways.

To summarize, the most common approaches for generating OTP codes are:

• TOTP (Time-based One-Time Password): this type of algorithm requires synchronization between the authentication server and the user’s device, since it constantly generates OTPs valid for a very short time, typically 30 or 60 seconds. It can be used with physical tokens (hardware security tokens) or proprietary apps (soft tokens).

• Challenge-response: in this type of OTP, the server generates a random value (the “challenge”) and sends it to the user, who, using the shared secret key and a specific shared algorithm, generates a unique response to that request. If the user responds correctly (e.g., by receiving an SMS or email), authentication is successful. This challenge-response mechanism, invisible to the end user, is among the most widespread due to its flexibility and adaptability to different OTP tokens.

• HOTP (Hash-based Message Authentication Code One-Time Password): in this case, the passwords are based on a random string mapped into a fixed-length string through a non-reversible cryptographic hash function. This type of algorithm uses a shared secret key and a counter that tracks events. It is event-driven, meaning the password is generated after a user action and remains valid until a new code is created. A new OTP can be generated after each use or upon user request, who can manually update their disposable passwords.

OTP via SMS, email or physical token: what’s the difference?

The OTP code thus generated can be shared with the end user through different channels. TOTPs, for instance, which depend on device synchronization, can be displayed on dedicated hardware devices such as OTP displays or smart cards, or via so-called soft tokens — generally sync apps like Google Authenticator or other password managers.

For HOTPs, it is sufficient that the user’s device is synchronized with the server’s counter, which increases every time a new code is generated. OTPs generated via hash can also be sent via SMS, although physical tokens and specific smartphone apps are usually preferred.

For OTPs generated from a random value, the synchronization element is the specific challenge (which changes at each access attempt). Security relies on the shared secret between server and user, allowing passwords to be sent via SMS, email, or other methods without major limitations.

OTP: why it is crucial for online security

Although still minimally exposed to some cyberattacks, one-time passwords are becoming increasingly widespread. OTPs significantly reduce the risks associated with compromised passwords and cyberattacks, making online operations much safer.

Because they can be shared in real time through highly accessible channels like SMS, email, or smartphone apps, one-time passwords are also easy to integrate into existing systems.

Moreover, one-time passwords are an essential tool for compliance: data protection regulations such as the GDPR require strong authentication mechanisms for securing sensitive information. OTP passwords can therefore be used to ensure regulatory compliance in sensitive operations such as digitally signing a document.