Blockchain is drawing attention as a new technology that will change 21st century. ‘Distributed ledger’ technology, which was developed through collective intelligence, is drawing attention as an important technology for digital generations after going through ‘21st century tulip bubble’ crisis.
◊Blockchain, Distributed Ledger That Cannot Be Modified
Reason why blockchain is drawing so much attention is because it was able to overcome ‘Byzantine General’s problem’, which had been criticized as a problem that could not be solved for many years.
Byzantine General’s problem, in other words, indicates limitations of P2P (Peer to Peer) network. Just like generals who could not trust others during Byzantine era, individuals from internet are also participants of transactions who cannot trust each other.
During this time, third-party organizations had played a role of saving transactions between individuals into ledgers and guaranteeing these transactions. However, third-party organizations were exposed to hackers and errors and had to pay high social costs.
In financial fields, central banks had played roles of third-party organizations. However, people started not to trust central banks after Lehman Brothers went bankrupt after the financial crisis in 2008. They believed that these central banks actually lowered values of money by controlling amount of currencies however they wanted.
At that time, anonymous developer called Nakamoto Satoshi introduced a paper online in October of 2008. This monumental paper with a title ‘Bitcoin P2P Electronic Money System’ proposed a concept of Bitcoin for the first time. He explained that Bitcoin, which is an electronic currency for P2P versions, is a system that allows online payment transactions between people who are involved in transactions without any interference from financial organizations.
Network that participated in transactions recorded transactions chronologically through ‘time-stamping’ function. Blocks that have new information on transactions are created whenever there are transactions between individuals, and every participant who are connected to computer network are connected through chains. Computers that are involved in transactions needed to solve encrypted mathematical formulas and received Bitcoins for enhancing network security and participating in blockchain.
Ledgers are encrypted and stores separately. To change entire records, hackers must hack into more than half of distributed ledgers at the same time. Blockchain is based on a method where every participant shares and store ledgers rather than a server-client method that is generally used on internet. Every participant from Bitcoin network can see every transactional information of Bitcoin.
Nakamoto Satoshi proved a concept of virtual currency by mining himself in January of 2009. Mining is when Bitcoin is newly created by applying encrypted technologies and proof of work. Due to mining, ‘Dotori’ of Cyworld and points of credit cards are fundamentally different from Bitcoin. Blockchain is a type of collective intelligence.
◊Speculation Frenzy That Caused Virtual Currency Crisis
After Nakamoto Satoshi introduced Bitcoin, Bitcoin aimed to become the supranational payment method. When it was first created, only few people shared and used Bitcoin.
In principle, virtual currency including Bitcoin are created through mining and they are purchased through exchange traders called exchanges. Initially, value of Bitcoin did not skyrocket as it is right now, and it was used as a payment method only by few places. Moreover, people were already worried about possibilities of Bitcoin being abused for crime such as money laundering as people could participate in transactions anonymously.
However, due to Cyprus Incident in 2013, virtual currency started to draw attention globally for the first time as ‘digital gold’. This is when price of Bitcoin skyrocketed for the first time. However, forecast of virtual currency was filled with pessimistic views when MtGox, which was the number one virtual currency exchange at that time and controlled 80% of Bitcoin transactions, was hacked in 2014 and went bankrupt. Value of Bitcoin dropped from $1,000 in 2013 to $300.
After awhile, value of Bitcoin that hit the rock bottom started to go up again as Chinese businesses started to jump into mining business on full-scale.
Actually, the starting point of speculation frenzy was when Japanese Government approved virtual currency as a payment method in April of 2017. Japanese Government ordered virtual currency exchanges to register themselves and imposed regulations on their acts. It also suggested them to separate and manage money that was deposited by their users or virtual currency. Besides these regulations, it also ordered verification of users when they open up accounts to prevent money laundering and others.
Japanese Government legalized regulations on virtual currency to prevent money laundering and to protect users. Ultimately, this led people to believe that virtual currency has been instituted and it has led to speculation frenzy. Legalization by Japanese Government was the starting point of expansion of sizes of transactions.
However, people started to worry more about illegal acts such as fraud and pyramid that abuse virtual currency.
In midst of this trend, China, which was the biggest virtual currency market along with Japan, regulated all types of ICO (Initial Coin Offering) as illegal starting from last September.
ICO is a similar concept as IPO (Initial Public Offering) and it is a type of Cloud funding that draws funds by putting out new virtual currency. Bitcoin was being dealt for over $4,000 through virtual currency exchanges at that time and its price increased by more than 400% compared to early 2017. Chinese Government prohibited any virtual currency transactions along with ICO entirely.
South Korean Government also prohibited ICO entirely on the 29th of September due to increased concerns about speculation and started to prepare solutions. This is after daily exchange volume of virtual currency through a South Korean exchange called ‘Bithumb’ already surpassed $2.42 billion (2.6 trillion KRW) in August and surpassed daily exchange volume of KOSDAQ.
Although ICO has become prohibited in South Korea, speculation frenzy has not been put out. Price of virtual currency skyrocketed. Price of Bitcoin surpassed $20,000 in early December and it increased by 20 times compared to its price in early 2017. At that time, amount of virtual currency surpassed $428 billion (460 trillion KRW) based on standards of CoinMarketCap.
Foreign press also focused on South Korea, which was responsible for 21% of entire virtual currency transactions in the world. Bloomberg and others pointed out that it was a strange phenomenon considering that South Korea’s GDP (Gross Domestic Product) was only 1.9% compared to the world’s GDP.
In early December, there were more than 50 businesses who wanted to start virtual currency exchanges. Speculation frenzy regardless of age and sex swept through entire country.
Although transactions involving derivative goods that have Bitcoin and others as basic assets started in the U.S., South Korea’s regulation authorities announced its adamant regulation policies on entire virtual currency including derivative goods.
Even though South Korean Government started to regulate virtual currency, price of virtual currency continued to skyrocket for awhile. Even other virtual currencies that are called ‘Altcoin’ also recorded upper limit prices.
To prevent speculation frenzy, South Korean Government started to establish regulations and policies on full-scale starting from end of last year. It enforced verification process during withdrawal and deposit processes through virtual currency exchanges and allowed users to withdraw and deposit from their own accounts. It prohibited people under 19 and foreigners (nonresident) to open up accounts. It also notified exchanges that they could be thrown out if they do not follow special guidelines set by the government.
Due to strict regulations, upward trend of prices of virtual currencies started to slow down. Due to more strict regulations established by governments, people started to worry that values of virtual currencies might collapse. In January of 2018, price of Bitcoin dropped by more than 50% and fell below $10,000.
Even U.S. regulation authorities that allowed transactions involving derivative goods announced that it will carefully investigate any frauds or illegal transactions during ICO process.
Biggest hacking incident involving a virtual currency exchange took place in Japan. NEM (New Economy Movement’ coins worth $545 million were robbed. Credibility of entire virtual currency industries fell as weak security management of virtual currency exchanges came to light.
Governments agreed on a need for regulations towards virtual currency frenzy. Although virtual currency can cause social confusion due to its extreme variability in price, governments turned their attention towards blockchain, which is a fundamental technology, paradoxically. Separate from virtual currency frenzy, they are looking for ways to promote blockchain technologies.
Professor Jung Soon-seop of Seoul National University’s School of Law pointed out that there are extreme assessments towards virtual currency from both ends. “Although some see virtual currency as a fruit of high-tech technologies and emphasizes it as a symbol of FinTech or an innovative payment method that combines technologies with finance, others see it as a mysterious thing that induces speculative transactions from unspecified people rather than as a payment method.” said Professor Jung.
Blockchain, which is the fundamental technology of virtual currency, has advantages in effectiveness, security, stability, and transparency compared to current centralized systems. Unlike Bitcoin that aimed to become the payment method, Ethereum that is considered as ‘blockchain 2.0’ can be used in various industries as a platform for Smart transactions.
Ethereum was developed by a genius developer Vitalik Buterin, who was born in Russia, in 2015. He compared Ethereum to platforms within Smartphones such as App Store or GooglePlay. Unit of virtual currency within Ethereum platform is ‘Ether’. Within Ethereum platform, transactions are only performed whenever designated conditions are met by inserting Smart transactions as codes using a language called ‘Solidity’.
◊Blockchain to Become the Foundational Technology for Ultra-Connected Society
Experts are seeing Bitcoin as first generation blockchain and Ethereum as second generation blockchain.
If Bitcoin presented a possibility of a payment method that does not need central banks, Ethereum is seen as a fundamental technology for ultra-connected society that is also called as Industry 4.0.
Individuals, objects, and individuals and objects will be automatically connected and controlled intelligently during Industry 4.0 generations. If this method is applied to large-scale data centers that are integrated as a central server, cost will skyrocket and there will be higher security and management threats. Distributed network and blockchain are presented as alternatives.
Governments that are showing different opinions towards virtual currency all show positive attitudes towards blockchain technologies. Industries are actively carrying out R&D related to blockchain technologies together.
Currently, governments are looking to use blockchain technologies as public blockchain, private blockchain, and consortium. While there are distributed ledgers that allow participants to equally share transactional information just like Bitcoin, there is also a private blockchain that is only shared to particular participants.
Private blockchain improves disadvantage of public blockchain where it takes longer to process transactions and is difficult to expand as every participant need to be connected to network. Although generally it is thought that blockchain does not need a central organization, there are central organizations that are responsible for transactions that occur from private blockchain. Out of new Altcoins, there are some that were released in a form of private blockchain.
There is a version between public blockchain and private blockchain. Only approved users can participate in this version, which can change regulations depending on participants of a consortium. Many banks and financial organizations are pushing for consortium blockchain.
Virtual currency is still an asset that has huge variability as its value can be ‘zeroed’ in just a matter of a day. Many attempts and experiments carried out by blockchain can also lead to failures. There was already foreign press that reported that half of ICOs from last year resulted in failure.
“Just like how many internet companies disappeared after dot-com bubble, many blockchain businesses will also have to go through difficult competitions to survive.” said Kim Yeol-mae who work as a researcher for Eugene Investment & Securities. “Indefinite optimistic views and pessimistic views are unnecessary. It is time to follow flow of changes that is rapidly changing.”
Staff Reporter Kim, Myunghee | noprint@@etnews.com