In this blog post, we will examine the impact of cryptocurrency and blockchain technology on financial markets, their potential applications, and their challenges.
Cryptocurrencies, which shook global financial markets during the brief period from late 2017 to early 2018, are as familiar as their name suggests, but their underlying principles are by no means simple. However, the blockchain technology that forms the foundation of these cryptocurrencies is highly useful, and because its potential applications are growing, it is essential to understand it.
Before delving into cryptocurrencies, we must first examine the blockchain technology that makes them possible. Blockchain is a type of ledger—a technology that distributes and stores data such as transaction records. In traditional transaction systems, an authoritative third party, such as a bank, stores and verifies all transaction records. In contrast, blockchain divides transaction records into blocks and distributes them for storage among multiple parties. When verifying transaction records later, the system connects all these data points to confirm their validity. The “blocks” used here are the basic units that make up the blockchain. As information accumulates within a block, the next block is appended, and this process of adding new information repeats, causing the blocks to link together in a long chain. This mechanism is the origin of the name “blockchain.” Technically, to generate a block, one must continuously perform computations using a computer and go through the process of decrypting a cryptographic puzzle established on the server. This process is called “proof of work” or “mining.” True to the name “mining,” the first person to complete the process of decrypting the code to unlock an empty block and storing the transaction details along with the data from the previous block receives cryptocurrency as a reward. This mining process verifies that there are no errors in the transaction data, ensuring the transparency of the transaction records.
As mentioned earlier, the driving force behind maintaining and continuously developing the blockchain is the reward of cryptocurrency and the transaction ledger. There are various types of cryptocurrencies, and the most representative and well-known among them is Bitcoin. Bitcoin was the first cryptocurrency to be implemented, consisting solely of users connected via a network without any central government or intermediary financial institutions. Since then, many other cryptocurrencies have been developed, including Ethereum, Ethereum Classic, Ripple, Stellar, Litecoin, Zcash, and Quantum; these cryptocurrencies, excluding Bitcoin, are referred to as “altcoins.” Each cryptocurrency has its own unique transaction and security mechanisms.
This blockchain technology and the cryptocurrencies that utilize it possess strengths in terms of security and transparency that no other currency can match. When a transaction is made via blockchain, a ledger is created and stored in a single block, and this information is updated every 10 minutes and transmitted to users. Therefore, to manipulate transaction records, one would have to hack every individual’s block, which is virtually impossible, resulting in immense security and transparency. Additionally, there is the advantage that the market is maintained in a way where all users ensure reliability without the control of banks or specific financial institutions. Previously, ownership of virtually all assets required the guarantee of a third-party institution to ensure reliability. However, this technology allows data to be distributed and stored among all participants, making it impossible to copy or forge information, thereby enabling ownership to be recognized without the need for a third-party institution. Utilizing this technology can greatly simplify financial transaction processes.
However, as this technology is still under development, it also entails many issues. First, since there is no separate governing body or entity, there is no party to hold accountable for errors or problems arising during transactions. Additionally, while the forgery of cryptocurrencies themselves is technically prevented, hacking cryptocurrency exchanges or devices where cryptocurrencies are stored is a separate issue, so risks related to this persist. In fact, in 2016, the venture capital firm DAO, which had adopted blockchain technology, had cryptocurrency worth $6,000 stolen, and the Hong Kong-based cryptocurrency exchange Bitfinex reportedly had cryptocurrency worth $68 million stolen. Furthermore, the instability of the cryptocurrency market has recently emerged as a significant issue. Although this may not be a problem inherent to cryptocurrency itself, a currency that experiences a $200 fluctuation in value within two days risks losing its function as a currency and becoming merely an object of investment or speculation.
“Bitcoin is an amazing cryptographic achievement. The fact that something cannot be replicated in the digital world is tremendous. Countless businesses will emerge from this.”
Google Chairman Eric Schmidt made the above statement. In fact, blockchain technology is currently attracting attention for its potential applications not only in currency but also in various fields such as financial services and telecommunications. In Korea as well, various companies including Samsung, SK, and KT have established departments dedicated to developing services utilizing blockchain technology and are actively working on related technologies. Although cryptocurrencies have been swept up in a temporary craze, leading to doubts about their usefulness and significance and causing them to be reduced to mere objects of investment and speculation, it is clear that cryptocurrencies and blockchain are subjects that must continue to be developed and researched. Rather than rejecting this technology due to concerns about its shortcomings, we should seek ways to actively utilize the new paradigm of operating independent transaction services through distributed storage via research and development.
