In late 2017 and early 2018, cryptocurrencies became the talk of the town, shaking up financial markets around the world. The blockchain technology that underpins cryptocurrencies has the advantage of enhancing security and transparency, but it also presents a number of challenges as it is still evolving.
The cryptocurrencies that shook up financial markets around the world in a short period of time from late 2017 to early 2018 may be familiar by name, but their principles are far from simple. However, the blockchain technology that underpins them is extremely useful and increasingly popular, and it’s important to know about it.
Before we dive into cryptocurrencies, let’s take a look at the blockchain technology that makes them possible. A blockchain is a kind of ledger of transactions, a technology that decentralizes the storage of data such as transaction history. In traditional transactions, an authoritative third party, such as a bank, stores and verifies all transactions, but in blockchain, transactions are divided into blocks and distributed among many people. When checking the transaction history, this data is then linked together to verify it. The “block” is the basic unit that makes up the blockchain. As information is accumulated in a block, the next block is added, and another block is added, and so on, forming a long chain of blocks. This mechanism is where the name “blockchain” comes from. Creating a block technically requires a constant stream of computerized computations, which involves decrypting a cipher built on a server. This process is called ‘proof of work’ or ‘mining’. True to its name, mining rewards cryptocurrency for being the first to complete the process of solving an empty block by decrypting it to create a block, and storing the transaction along with the data from the previous block. This mining process verifies that the transaction history is free of data errors and ensures transparency.
As mentioned earlier, it’s these rewards and the ledger of transactions called cryptocurrencies that keep the blockchain running and constantly evolving. There are many different types of cryptocurrencies, the most representative and famous of which is Bitcoin. Bitcoin was the first cryptocurrency to be implemented, with no central government or intermediary financial institution, just a network of connected users. Since then, many other cryptocurrencies have been developed, including Ethereum, Ethereum Classic, Ripple, Stellar, Litecoin, JetCash, and Quantum, which are referred to as “altcoins”. Each cryptocurrency has its own unique transaction and security methods.
Blockchain technology and the cryptocurrencies that utilize it have advantages that no other currency can match in terms of security and transparency. When a transaction is made on a blockchain, a ledger is created and stored in a single block, which is updated every 10 minutes and sent to users. To tamper with the transaction history, one would have to hack all of the blocks for each individual, which is nearly impossible, making it incredibly secure and transparent. It also has the advantage of maintaining a marketplace that is not controlled by banks or any particular financial institution, ensuring trust among all users. Previously, ownership of virtually any asset required a third party to guarantee its authenticity, but with this technology, ownership can be recognized without a third party, as data can be stored distributed across all participants, making it impossible to copy and forge information. This can greatly simplify the process of financial transactions.
However, this technology is still evolving, so it also presents a number of challenges. For starters, there is no governing body or entity to hold accountable for mistakes or problems that occur during the transaction process. There are also risks associated with the technology, as while counterfeiting the cryptocurrency itself is technically impossible, hacking into a cryptocurrency exchange or the device on which it is stored is another matter. In fact, in 2016, a venture capital DAO that utilized blockchain technology had $60,000 worth of cryptocurrency stolen, and Hong Kong-based cryptocurrency exchange Bitfinex reportedly had $68 million worth of cryptocurrency stolen. In addition, the instability of the cryptocurrency market has also been an issue in recent years. Although not inherent to the nature of cryptocurrencies themselves, a currency that can fluctuate in value by $200 in two days is at risk of losing its function as money and becoming a mere investment or speculation.
“Bitcoin is an incredible cryptographic achievement. To be able to create something that can’t be replicated in the digital world is huge. It’s going to spawn a lot of businesses.”
Google Chairman Eric Schmidt said. In fact, blockchain technology is currently being used in a variety of fields, including financial services, telecommunications, and more. In Korea, various companies such as Samsung, SK, and KT have established departments to develop services utilizing blockchain technology and are developing related technologies. Even though cryptocurrencies have been swept up in a temporary craze, their usefulness and existence have been questioned, and they have been reduced to mere investment and speculation, it is clear that cryptocurrencies and blockchain are something that should be continuously developed and researched. Rather than rejecting the technology out of concern for its problems, research and development should seek to capitalize on the new paradigm of operating independent transaction services through distributed storage.
