“We will accept Bitcoin as payment.”

Elon Musk, the CEO of Tesla, announced in February of 2021 that Bitcoin would be accepted as Tesla’s payment method. This is not the only new change related to cryptocurrency. The largest cryptocurrency exchange in the U.S., called Coinbase, has successfully listed its name on NASDAQ, and Canadian financial authorities have approved the world’s first Exchange Traded Fund (ETF).

As many companies have adopted cryptocurrency as a means of transaction and the international financial community is considering it as an investment target, cryptocurrency has been steadily increasing its value this year. The price of the first cryptocurrency, Bitcoin, was once traded above ￦80 million in Bithumb and $63,000 in Poloniex. Also, Dogecoin enjoyed a boom in April, with 130% of increase in a day.

The number of domestic cryptocurrency investors has surged. The government’s “Cryptocurrency Transaction Management Plan” found that there are currently six million subscribers using the nation’s four largest cryptocurrency exchanges.

Many people are into cryptocurrency, but not many people will be able to explain exactly what it is. It is based on a technology called “blockchain.” Blockchain is a distributed data storage technology that stores data in blocks by connecting them in a chain form and replicating them to many computers at the same time. A block is a unit of a single database. It has two properties which make the blockchain technology valuable. First, the block can be only appended and cannot be modified or deleted. As nobody can edit your data, it is considered safe and is used to save information that never changes. For example, individuals can add their university diploma, and the government can save the driver’s license records or subsidy information to a blockchain. Next, blockchain technology is decentralized so that a particular individual cannot manage the database. Everyone has the original database which makes it hard to be deleted or manipulated. The first blockchain, Bitcoin, was demonstrated by Satoshi Nakamoto after his recognition of the risks of a centralized financial system through the 2007 Subprime Mortgage crisis. To overcome these risks was a key focus to him.

How can we append the data to a blockchain? To understand the process, we have to know more about the block. A block consists of a hash of the block, the previous hash, and the data. A hash function is a mathematical function which determines how the data is connected in the blockchain. Since the hash is a function, it consists of one input and one output. There are two characteristics of a hash: a one-way function and a deterministic function. Since a hash is a one-way function, it is impossible to infer input through output, and it is a sensitive function that changes output rapidly as the input changes slightly. This means that the entropy[1] of a hash is very high, maximizing the security of the data. Being deterministic means that if we enter the same input, we receive the same output. The first step of appending information is collecting the data of the blockchain. For example, if we want to add something to a Bitcoin, we have to collect the transaction data of it. Next, we have to get the hash of the previous block and hash it with the data which makes our own hash. Finally, we can add our own hash into the blockchain.

Cryptocurrency is used as a mean of transaction, so it can cause problems if anyone registers any information. Therefore, according to the purpose of the blockchain, access can be restricted. To certify the data, users must verify the mining.

There are some problems that have to be discussed before cryptocurrency can be accepted as a payment.

The first problem is that the volatility is too high. The value may vary widely at the time a transaction is made, and the situation becomes more complicated if the refund process is considered.

The next problem is that it takes a lot of graphic chips to mine coins. Mining is a process of verifying the data coming into the blockchain, and the miner uses graphic cards for it. The total amount of mining coins is fixed, so the difficulty of mining is increasing over time. In the case of Bitcoin, the efficiency of mining decreases and the power consumption as well as the needed number and performance of graphic cards increases. According to Cambridge University Statistics, 133 TWh of electricity is used to mine Bitcoin worldwide in a year, equivalent to the amount used in Malaysia or Sweden in the same period. China and Mongolia, where 65% of Bitcoin mining plants are concentrated, produce 60% of their total electricity as thermal power. They announced that 210 million tons of coal will be used in 2021 due to the popularity of mining plants. Considering these environmental issues, Tesla’s Musk, who originally adopted Bitcoin as a payment, decided to stop Bitcoin payments in June 2021.

Finally, there are situations in which servers are hacked due to the limitations of blockchain technology itself. For example, if one group own a majority of the worlds’ mining computers, then there will be no restrictions on storing blockchain information. This could eventually lead to the collapse of the legitimacy of the technology itself.

As I researched the superiority of the blockchain, I am sure that this technology will bring a new sensation to the IT field, but it still leaves a question of whether it will coexist with the traditional currency and be adopted as a means of transaction.

Chung Yeongyu  ygchung00@naver.com

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