This blog post examines the impact of cryptocurrency and blockchain technology on financial markets, their potential applications, and their challenges.
Cryptocurrency, which shook global financial markets in the brief period from late 2017 to early 2018, is as familiar as its name suggests, yet its underlying principles are far from simple. However, the blockchain technology that forms the foundation of cryptocurrency is highly useful, and its potential applications are growing, making it essential to understand.
Before delving into cryptocurrency itself, we must first examine the blockchain technology that enables it. Blockchain is a type of ledger that employs distributed storage for data such as transaction records. In traditional transaction methods, an authoritative third party like a bank stores and verifies all transaction records. Blockchain, however, divides transaction records into blocks and distributes their storage across multiple participants. When verifying transaction records later, the structure relies on linking all this data together. The ‘blocks’ used here are the fundamental units that compose the blockchain. As information accumulates within a block, the next block is added, and this process of accumulating further information repeats, linking the blocks together in a long chain. This mechanism is why it is called a ‘blockchain’. To create a block, technically, continuous computational work using computers is required, involving the process of decrypting a cryptographic puzzle built into the server. This process is called ‘proof of work’ or ‘mining’. True to its name, mining involves being the first to complete the process of decrypting the cryptographic puzzle to unlock an empty block. Once completed, the miner stores the transaction details alongside the data from the previous block and receives cryptocurrency as a reward. This mining process verifies the absence of data errors in the transaction history, ensuring its transparency.
As mentioned earlier, the driving force enabling blockchain maintenance and continuous development is precisely this reward of cryptocurrency and the transaction ledger. Cryptocurrencies come in various forms, with Bitcoin being the most representative and famous. Bitcoin is the first implemented cryptocurrency, existing solely through a network of connected users without a central government or intermediary financial institutions. Since then, many other cryptocurrencies have been developed, including Ethereum, Ethereum Classic, Ripple, Stellar, Litecoin, Zcash, and Quantum. Cryptocurrencies other than Bitcoin are referred to as ‘altcoins’. Each cryptocurrency possesses its own unique transaction method and security protocol.
This blockchain technology and the cryptocurrencies utilizing it possess strengths in security and transparency that no other currency can match. When transactions occur via blockchain, a ledger is created and stored within a single block. This information is updated every 10 minutes and transmitted to users. Therefore, to manipulate transaction records, one would need to hack every individual’s block—a nearly impossible feat, resulting in immense security and transparency. Additionally, the market is maintained in a form where all users ensure reliability without control by banks or specific financial institutions. Previously, ownership of virtually all assets required third-party guarantees for reliability. However, this technology enables distributed data storage among all participants, making it impossible to copy and forge information. Consequently, ownership can now be recognized without third parties. Utilizing this can greatly simplify financial transaction processes.
However, as this technology is still evolving, it also contains many issues. First, because there is no separate managing authority or entity, there is no one to hold accountable for errors or problems arising during transactions. Furthermore, while counterfeiting the cryptocurrency itself is technically completely blocked, hacking cryptocurrency exchanges or the devices where cryptocurrency is stored is another problem, meaning risks related to this exist. Indeed, in 2016, the venture capital DAO, which adopted blockchain technology, had cryptocurrency worth $6,000 stolen, and the Hong Kong-based cryptocurrency exchange Bitfinex also reportedly had cryptocurrency worth $68 million stolen. Furthermore, the instability of the cryptocurrency market has recently emerged as a significant problem. Even if not directly caused by the inherent nature of cryptocurrency itself, a currency experiencing a $200 fluctuation in value within two days risks losing its function as money and becoming merely an object of investment or speculation.
“Bitcoin is an amazing cryptographic achievement. The fact that you can create something in the digital world that is non-duplicable is huge. A lot of businesses will be derived from that.”
Google Chairman Eric Schmidt stated this. Indeed, blockchain technology is currently drawing attention for its potential applications not only in currency but also in various fields like financial services and telecommunications. In Korea too, companies like Samsung, SK, and KT have established new departments to develop services utilizing blockchain technology and are advancing related technologies. Although cryptocurrencies have been swept up in a temporary craze, leading to doubts about their usefulness and significance, and have sometimes been reduced to mere objects of investment and speculation, it is clear that cryptocurrencies and blockchain are subjects that must be continuously developed and researched. Rather than rejecting this technology due to concerns about its problems, we should actively seek ways to leverage this new paradigm—the operation of independent transaction services through distributed storage—through research and development.
