Steganography (pronounced STEHG-uh-NAH-gruhf-ee, from Greek steganos, or "covered," and graphie, or "writing") is the hiding of a secret message within an ordinary message and the extraction of it at its destination. Steganography takes cryptography a step farther by hiding an encrypted message so that no one suspects it exists. Ideally, anyone scanning your data will fail to know it contains encrypted data.
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In modern digital steganography, data is first encrypted by the usual means and then inserted, using a special algorithm, into redundant (that is, provided but unneeded) data that is part of a particular file format such as a JPEG image. Think of all the bits that represent the same color pixels repeated in a row. By applying the encrypted data to this redundant data in some random or nonconspicuous way, the result will be data that appears to have the "noise" patterns of regular, nonencrypted data. A trademark or other identifying symbol hidden in software code is sometimes known as a watermark.
Recently revived, this formerly obsolete term gained currency in its day (1500) from a work by Johannes Trithemius, Steganographia, ostensibly a system of angel magic but also claiming to include a synthesis of how to learn and know things contained within a system of cryptography. The book was privately circulated but never published by the author because those who read it found it rather fearsome.