Blockchain technology, which underpins cryptoassets, is revolutionary because it is the opposite of conventional software design. 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 over a “chain of blocks.”
Every time 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 intended to make blockchain applications much more difficult to hack or for a small group of individuals to act in cohort for the purpose 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 most well-known cryptocurrency.
Cryptocurrencies have crashed – but is blockchain to blame?
However, in recent weeks, various cryptocurrencies have lost significant value, leading to many debates surrounding their relevance, security and sustainability. It appears that the decline in value of most cryptocurrencies was caused by the spectacular fall of 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, caused Terra’s UST stablecoin to be “depegged” from the USD.
It is not yet clear why such massive withdrawals occurred, and whether it was the result of some kind of conspiracy (the high correlation with stock market movements suggests something wrong, although it is not clear by whom and for what purpose). It is sad that investors lost billions of dollars in a matter of hours and days, and even if a new version of Terra coin has been launched, it is too early to say whether it will succeed. Naturally, questions are raised about the much-vaunted security of blockchain technologies.
Trust is essential to any innovation – the key is finding better ways to use blockchain
Whether it is the world of crypto-assets or real assets, one important lesson is that: reliability will always trump technology and other tangibles underlying 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 to further strengthen its reliability so that even accidental loopholes do not occur.
Blockchain technology also finds application in a number of other areas. These include supply chain management, shipping & logistics, e-governance, energy, education and financial services. Food traceability, music rights enforcement, securing payments and even tamper-proof vaccination certificates can all be delivered via blockchain. Many of these use cases are already being implemented in India. Even the emerging metaverse world is expected to make use of blockchain concepts.
