The Reason for Blockchain's Birth Is Decentralization and Anonymity
The Essence Is Fading in Cryptocurrency and Blockchain
The Hotter the Cryptocurrency Market, the More We Must Reflect on Its Value and Vision
[Asia Economy Reporter Gong Byung-sun] In October 2008, an anonymous developer named Satoshi Nakamoto created Bitcoin. In the introduction of the paper he wrote, he thoroughly excluded central financial institutions. Instead of operating based on trust in centralized control, he chose a method where all transaction participants verify the information. The information is contained in blocks, and the blocks are linked together in a chain. This is the moment when the distributed data storage technology called 'blockchain' was born.
The value of virtual currency comes from the blockchain. Unlike stocks, which are quantitatively derived from finance, sales, and operating profit, and qualitatively from a company's vision and owner risk, virtual currencies are valued based on a blockchain that possesses 'decentralization' and 'anonymity.'
Eleven years after Satoshi Nakamoto created Bitcoin, the virtual currency market is hotter than ever. Many people are focusing on virtual currencies and blockchain as future growth industries. However, it is necessary to examine whether the virtual currencies currently being traded truly possess the fundamentals of decentralization and anonymity. Is blockchain really progressing as Satoshi Nakamoto wished?
Decentralization Has Collapsed
As mentioned earlier, the core of virtual currency is decentralization. It is the reason why all transaction participants endure the inefficiency of participating in information processing. However, it is difficult to say that current virtual currencies have achieved decentralization.
Lee Byung-wook, CEO of Kras Lab, explained, "Currently, about 90% of Bitcoin is held by around 10 miners," adding, "This situation is far from the decentralization that Satoshi Nakamoto wanted." In February, virtual currency data company Glassnode analyzed that only 20% of the Bitcoins produced so far are circulating, and the rest are held by long-term investors. This means some can manipulate the entire Bitcoin market price.
At least Bitcoin can be mined if an individual is willing to invest in electricity and graphics cards, so decision-making entities can be somewhat distributed. However, the other altcoins are controlled by a few decision-makers.
The decision-making of Ethereum, created by developer Vitalik Buterin, is strictly controlled by a few. Currently, the issuance volume of Ethereum is not fixed, but if Buterin and the Ethereum Foundation decide to limit issuance, the situation will inevitably change drastically. In fact, Buterin submitted a proposal to fix Ethereum's issuance volume at a developer meeting in 2018. Professor Hong Ki-hoon of Hongik University's Business Administration Department explained, "Ethereum investors have to rely on vague trust that Buterin and the Ethereum Foundation will devote themselves to the public interest rather than personal gain." This is not much different from the centralized financial institutions based on trust that Satoshi Nakamoto sought to exclude.
Anonymity, Both the Greatest Strength and Weakness... Hard to Guarantee
The anonymity, which is the core of blockchain technology, is also difficult to guarantee. This is because the virtual currency market has been incorporated into existing systems where personal information must be verified to trade goods.
Due to the structure that requires trading through virtual currency exchanges, guaranteeing anonymity has become difficult. After the virtual currency boom in 2017-2018, domestic virtual currency exchanges began to introduce real-name account systems. According to the Specific Financial Information Act, by September 24, virtual currency exchanges must meet requirements such as real-name accounts issued by banks to operate. Moreover, virtual currency exchange operators must report suspicious money laundering transactions to the Financial Intelligence Unit.
This is not a problem unique to Korea. On the global virtual currency exchange Binance, identity verification is required to increase trading limits. Users must upload photos of identification documents such as passports and enter their country of residence and date of birth. They even have to take a photo of their face immediately to prove they are undergoing identity verification. Some investors complained about the inconvenience of having to nod their heads for verification.
There are many cases where the anonymity of virtual currencies has already collapsed. The most representative example is Jo Joo-bin, the main culprit of the nth room case. Jo Joo-bin frequently used virtual currencies such as Bitcoin, Ethereum, and Monero to conceal criminal proceeds. Monero, in particular, is a virtual currency focused on anonymity. However, his criminal proceeds were traced. Bitcoin and Ethereum allow tracking of deposit and withdrawal details through virtual currency wallet addresses from the start. Monero thoroughly guarantees anonymity, making it difficult to follow the flow of funds even if the wallet address is known, but if traded through exchanges, it is sufficiently possible. In fact, not only the domestic virtual currency exchange Bithumb but also global exchanges such as Binance, Huobi, and KuCoin have announced their cooperation in the investigation of the nth room case.
Value Is Rather Born Centrally... Virtual Currency Caught in Contradiction
Although decentralization and anonymity have collapsed, virtual currencies are soaring. Recent trends show that the value of virtual currencies originates centrally.
The news that led the rise of virtual currencies is related to incorporation into countries and companies. News that should have been a negative for virtual currencies aiming for decentralization is instead used as a positive. In February, with the listing of an Exchange-Traded Fund (ETF) on the Toronto Stock Exchange in Canada, expectations grew that an ETF would be listed on the largest U.S. market. Since 2018, when the U.S. Securities and Exchange Commission (SEC) rejected listings citing the possibility of illegal use, the virtual currency industry has prepared for virtual currency ETF listings even at the cost of giving up decentralization and anonymity. Professor Hong pointed out, "Bitcoin and blockchain, created for decentralization, are trying to gain recognition from the state and institutional sectors," calling it "a self-contradiction that denies their own value."
Klaytn, created by Ground X, a subsidiary of Kakao, has been embroiled in controversy from the moment it was created for being far from blockchain technology. It gave up decentralization itself. This aligns with criticisms of Facebook's Libra virtual currency, where security and decision-making are handled solely by Facebook, making it difficult to trust. According to Klaytn Docs, which introduces Klaytn, only those belonging to the decision-making body called the 'Governance Council' can make decisions. CEO Lee said, "Blockchain, created under the banner of decentralization, is declaring itself not decentralized," pointing out, "It is a contradictory situation that can be aptly called centralized decentralization technology blockchain."
Although far from the essence of blockchain, Klaytn's price surged from the 500 won range in February to the 5,000 won range this month. This is because it is related to Kakao, an existing large corporation incorporated into the institutional sector. According to the virtual currency market status relay site CoinMarketCap, as of the 10th, Klaytn's market capitalization recorded about 8.4453 trillion won. This is larger than well-known companies such as KT, Hyundai Construction, and E-Mart. The market capitalization of Paycoin, issued by the simple payment company Danal, was about 10.7 trillion won at the same time, 19 times Danal's market capitalization of 558.5 billion won.
Time to Reconsider the Value of Blockchain
Experts agree that as the virtual currency market and blockchain receive intense attention, careful verification is necessary. This is because phenomena such as altcoins surging before delisting, called 'delisting beams,' can cause significant losses. Professor Hong said, "There is no such thing as perfect security and technology," and added, "Rather than assuming blockchain technology is always right, it needs to be thoroughly verified and researched."
There is also an opinion that if virtual currencies and blockchain have lost decentralization and anonymity, a new vision must be presented. CEO Lee said, "It is unclear exactly what goal blockchain is growing toward," and added, "It is time for everyone to put their heads together and consider the pros and cons that virtual currencies and blockchain technology bring to society and how they can change society."
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