In this blog post, we’ll explore the principles by which blockchain uses distributed ledgers, cryptography, and consensus mechanisms to record information and make it difficult to forge or alter, as well as its potential applications in various fields, including finance.
Bitcoin originated as a digital currency system proposed by an individual or group using the pseudonym Satoshi Nakamoto. The basic concept behind Bitcoin was to enable participants to transact with one another without necessarily going through a trusted third party, such as a financial institution. In the past, there were many who doubted Bitcoin’s security simply because it was a currency without a central management system. However, Bitcoin combined technologies such as blockchain, public-key cryptography, and proof-of-work to present a structure capable of maintaining the integrity of transaction records even without a central authority. Since then, research has explored the potential applications of blockchain technology not only in Bitcoin and various other cryptocurrencies but also in diverse fields such as supply chains, data registries, digital identities, and records management.
Blockchain is an information processing method that records data—such as transactions—in a distributed digital ledger shared by multiple participants and maintains the integrity of those records using cryptographic techniques and consensus rules. Unlike systems that store all information in a single central database, multiple nodes in the network maintain copies of the ledger, and new transactions and blocks are added only after undergoing predetermined verification and consensus procedures. Therefore, even if a single participant arbitrarily alters the ledger in their possession, that change is not automatically recognized as the valid record for the entire network. However, not all blockchains operate simply on the principle that “if a majority holds the same information, it is deemed correct.” Each blockchain uses different consensus mechanisms and validation rules, including Proof of Work (PoW) and Proof of Stake (PoS). For example, imagine a group of people each keeping a copy of the group’s transaction ledger; when a new transaction occurs, they verify its validity according to predetermined rules and then record the same transaction in their respective ledgers. This analogy makes it relatively easy to understand the concept of a blockchain’s distributed ledger. In this scenario, even if one person were to tamper with their own ledger, it would not match the records held by other members, making it easy to detect the tampering.
Let’s take a closer look at how blockchain works in actual electronic transactions. It is not entirely accurate to refer to all information in a blockchain as individual “blocks.” A block is a unit that bundles and stores a set of transaction records and related data, and a blockchain is a structure in which these blocks are cryptographically linked end-to-end. When a new transaction occurs, the network’s nodes verify whether it complies with established rules and, following a consensus mechanism, include valid transactions in a new block. The new block is then added to the existing blockchain and propagated to the various nodes that maintain copies of the ledger. Because transactions undergo these processes—verification, consensus, block creation, and propagation—it becomes difficult for any single participant to arbitrarily alter past records. Although the specific operating mechanisms of blockchains vary by type, a key common principle is that multiple participants maintain an identical state of the ledger using a distributed ledger and consensus rules.
One of the technologies playing a pivotal role in this process is the cryptographic hash function. A hash function is a function that converts data of arbitrary length into a hash value of a fixed length. Cryptographic hash functions are characterized by the fact that while it is easy to calculate a hash value from an input, it is extremely difficult to determine the original input from the hash value alone; furthermore, even a slight change in the input data generally produces a completely different hash value. In a blockchain, since each block is cryptographically linked to the previous block, if the data in a past block is altered, the corresponding hash value also changes, which in turn affects the chain of blocks that follow. Consequently, it is easy to detect whether a record has been altered; arbitrarily modifying a past record to which a sufficient number of subsequent blocks have already been linked requires re-establishing the records and consensus process for all blocks following that point, making such alterations increasingly difficult. However, simply using a hash function does not automatically encrypt the information within a block, rendering it unreadable from the outside.
Hashing and encryption are distinct concepts; to ensure the confidentiality of a blockchain, access controls or separate encryption technologies must be used in conjunction.
In traditional financial transactions, banks and financial institutions manage core transaction data in a centralized system, and customers use the financial institution’s system when conducting transactions or checking transaction histories. Consequently, the financial institution’s databases and IT systems play a pivotal role in transaction processing, and any failure or cyberattack can have a severe impact on service. To prevent this, financial institutions implement various human and physical security measures, such as data center redundancy, access control, encryption, intrusion detection and prevention, and backup and disaster recovery. In contrast, blockchain allows multiple nodes to hold copies of the ledger, thereby reducing the likelihood that a failure in a single system would result in the loss of the entire ledger. Furthermore, since participants share records according to established verification and consensus rules, this can help enhance the integrity and traceability of transaction records.
However, it is inaccurate to claim that using blockchain eliminates the need for separate security technologies. Blockchain is also vulnerable to various risks, including network attacks, software vulnerabilities, private key theft, smart contract errors, attacks on the consensus mechanism, and security failures by the operating entity. While a distributed architecture helps reduce dependence on a single point of failure, it does not automatically block all cyberattacks. A DDoS (Distributed Denial of Service) attack involves sending a massive volume of traffic or requests to a specific service from many devices or systems, disrupting normal use; the distributed network architecture has the advantage of being designed so that even if a specific node is attacked, other nodes can continue to function. However, this does not mean that the entire blockchain network is completely immune to DDoS attacks; in actual service operations, both traditional network security and system security measures must be applied together.
Another characteristic of blockchain is its ability to enhance the transparency and traceability of records. In particular, public blockchains can be designed so that anyone can view transaction records, while permissioned blockchains allow authorized participants to jointly manage the ledger. However, the description that “all members share all information” does not apply to every blockchain. Blockchains can take various forms, such as public, permissionless networks open to anyone, and permissioned networks restricted to specific organizations or users. Therefore, the scope of information disclosure, access permissions, and transaction verification methods vary depending on the system’s purpose and design.
The potential applications of blockchain technology beyond cryptocurrencies have long been discussed. In the past, there was a reported case in Honduras where plans were pursued to utilize blockchain technology to enhance the reliability and transparency of land registry records. At the time, it garnered attention for its potential to prevent the forgery or alteration of land ownership records and to ensure the continuity of those records. However, since not all of the early blockchain pilot projects were successfully implemented as actual national systems, it is appropriate to view these cases as initial attempts to explore the technical potential of blockchain. Today, research into the potential applications of distributed ledger technology continues across a wide range of fields, including not only land registration but also supply chain management, data registration, digital identity, and records management.
The global financial industry, including South Korea’s financial sector, has also seen ongoing efforts to utilize blockchain and distributed ledger technology (DLT) to streamline the processes of remittances, payments, and the issuance, trading, and settlement of assets. In particular, cross-border payments face challenges such as prolonged processing times, increased costs, and reduced transparency in the transaction process as they pass through multiple financial institutions and intermediaries. Consequently, central banks, international financial institutions, and commercial banks are researching whether distributed ledgers or tokenized assets can be used to improve this structure. Recently, experiments have been conducted to improve cross-border payments and settlement finality by processing central bank money and commercial bank deposits on a shared platform or by tokenizing them. Therefore, rather than understanding blockchain as a technology that simply consolidates all information from existing financial institutions into a single ledger requiring only a single verification, it is more accurate to view it as a technology that has the potential to reduce some redundant verification and reconciliation processes by enabling multiple institutions to jointly share trustworthy transaction records and settlement statuses.
As such, blockchain distributes data across multiple participants and combines cryptographic hashes, digital signatures, and consensus mechanisms to ensure the integrity of records and the ability to detect tampering. Although blockchain became widely known through cryptocurrencies, it is no longer a technology limited to the financial sector. Research is underway into its potential applications in various fields, such as supply chains, digital identity, asset management, and various forms of data registration and record-keeping, and new systems combining it with smart contracts and tokenization technology continue to emerge. At the same time, there are challenges that need to be addressed, including processing performance and scalability, privacy protection, regulation and governance, interoperability, energy consumption, key management, and cybersecurity. Therefore, rather than viewing blockchain as a technology that unconditionally replaces centralized systems, it is preferable to understand it as an information system design approach that demonstrates its strengths in situations where multiple entities must jointly manage a single record and where there is a need to technically reinforce trust among participants.
