Blockchain technology, which underlies cryptoassets, is revolutionary because it is the opposite of conventional software designs. Data is not recorded and stored in a central database, with identified database administrators responsible for updating it and maintaining security. Think of a blockchain as a shared digital ledger of transactions. Unlike a traditional database that relies on tables, blockchains use “blocks” to store information. Each block has a certain storage capacity. When a block is filled (with transaction data), it is closed and cryptographically linked to the previously-filled block. Thus, information is distributed across a “chain of blocks.”
Whenever a new transaction occurs on the blockchain, a record of that transaction is added to the ledger of every participant in the blockchain. This paradigm is supposed to make blockchain applications much harder to hack or for a small group of individuals to act in cohort with the objective of cheating or committing fraud. Cryptocurrencies and NFTs are built and traded using blockchain technology; in fact, blockchains were first used to create Bitcoin, the world’s first-and probably best-known-cryptocurrency.
Cryptocurrencies have crashed- but is blockchain to blame?
In recent weeks, however, various cryptocurrencies have lost significant value, spurring numerous debates around their relevance, safety and sustainability. It appears that the drop in value of most cryptocurrencies was caused by the spectacular drop in Terra, a supposedly stable “fiat-backed” coin that was pegged to the USD, South Korean Won and Mongolian Tugrik and Luna, its sister cryptocurrency. It is believed that massive withdrawals from Anchor, a Terra-based decentralized finance (DeFi) protocol, led to Terra’s UST stablecoin being “depegged” from the USD.
It is not yet clear is why such massive withdrawals happened, and whether it was the result of some kind of conspiracy (the high correlation with stock market movements does suggest some wrongdoing, although it is not clear by whom and with what intent). It is sad that investors lost billions of dollars in a matter of hours and days, and although a new version of Terra coin has been launched, it is too early to say if it will succeed. Naturally, questions are being raised about the much-vaunted safety of blockchain technologies.
Trust is critical to any innovation- the key is to find better ways of applying blockchain
Whether it is the world of cryptoassets or real assets, a key lesson to be learnt is that: trustworthiness will always trump technology and other tangible traits that underlie any physical or financial asset. One must therefore resist the temptation to throw the baby out with the bathwater. In this case, I am referring to blockchains: we should not, based on the failure of cryptocurrencies, give up on blockchains. Instead, we must work on enhancing its trustworthiness even further, so that even inadvertent loopholes don’t arise.
Blockchain technology is finding application in a number of other areas as well. These include supply chain management, shipping & logistics, e-governance, energy, education and financial services. Food traceability, enforcing music rights, securing payments and even tamper-proof vaccination certificates can all be delivered via blockchain. Many of these use cases are already under implementation in India. Even the emerging metaverse world is expected to make use of blockchain concepts.
Blockchain technology is finding application in a number of other areas as well. These include supply chain management, shipping & logistics, e-governance, energy, education and financial services.