Blockchain: A Brilliant Work in Progress

Although cryptocurrency was first created over a decade ago, it was not until a few years ago that it started to become widely known and popularized among non-technical groups. The total market cap of cryptocurrencies rose dramatically from just over 100 billion USD in early 2019 to around 1.7 trillion USD in February of 2022. Blockchain, the technology used in crypto, is described as “an immutable distributed ledger” in the research article “Trust in Blockchain Cryptocurrency Ecosystem” (2019). Each crypto has a blockchain which contains all the information of every transaction ever made and is validated with multiparty verification, making it virtually impossible to modify. This validation of information on the blockchain contributes to the mining of the coin and helps create value within the system. The algorithms of blockchain allow digital currencies to be decentralized, intrinsically valuable, seamlessly transacted anonymously at any time or place, and theoretically safe. Each currency differs when it comes to the maximum supply, coin creation frequency, time it takes to verify a new block on the chain, etc. Mainstream hype must not cloud the fact that the cryptocurrency ecosystem still has many issues that should not be overlooked. 

First, although the system is decentralized and trustless, many people only trust fiat currencies, or money backed by government. While governments not regulating crypto is beneficial in many ways, one negative is that there are no laws against insider trading or other unethical hacks. For example, groups of individuals will “pump and dump”, or manipulate the coin’s price to make a profit. This action would be illegal in the stock market, but no such laws exist for cryptocurrencies. Fraudulent initial coin offerings (ICOs) are new coins made on existing crypto platforms and are scams that have likely costed investors billions of dollars. Some sort of self-regulation among users along with general education of the public will help reduce these issues.

Second, cryptocurrencies have not endured widespread adoption much due to their high volatility. Since it is traded in an open, online, and unregulated environment, amount and frequency of transactions can create upsurges in the price. Volatility in crypto is one of the main reasons many individuals believe itcannot replace fiat currencies. This volatility could be fixed by having constant coin creation frequency changes built into the algorithm to maintain the equilibrium of buyers and sellers.

Third, although cryptocurrencies are anonymous and private, cyberhackers can still launch successful attacks against virtual wallets. A cold storage wallet is the safest form since it remains offline unless a transaction is made. Most people use cloud-based wallets, which are relatively safe and store information offline, but they are centralized and run a risk of security attacks. Along with cybersecurity, a common knock on crypto is that criminals on the dark web use it. More complex algorithms will be able to detect trading on dark web sites and ban them.

Overall, blockchain technology is still being improved and many of the current issues with cryptocurrencies will be solved as algorithms advance. While it is likely crypto will never be perfect, implementing solutions to some of these larger problems could allow cryptocurrencies to “be the main drivers of financial institutions and the mainstreams economy” in the near future (Habib ur Rehman et al., 2019).

Citation:

Rehman, Salah, K., Damiani, E., & Svetinovic, D. (2020). Trust in Blockchain Cryptocurrency Ecosystem. IEEE Transactions on Engineering Management, 67(4), 1196–1212. https://doi.org/10.1109/TEM.2019.2948861