The promise of blockchain is being viewed as a foundational shift for the future of risk management. Practitioners across sectors are exploring this fast-evolving idea to help organizations minimize, and in an ideal case, eliminate, the risks posed by present systems. However, as any technology matures from theoretical use cases toward commercialization, it falls upon industries to ask the lesser-explored question – What risks this new technology exposes a business too?
Successful adoption of Blockchain Technology is contingent on the management of the risks associated with it. It becomes especially true when the technology is more than just an application, set to become a part of an organization’s core infrastructure. Here’s what ails this technology. We explore common myths and risks associated with blockchain, which are also among the causes behind its slow adoption amid firms and governments. Commonwealth Scientific and Industrial Research Organisation (CISRO), however, in its report on “Risks and Opportunities for Systems using blockchain and Smart Contracts” acknowledges that though blockchain has limitations, they are irrelevant to some use cases.
Two types of Blockchain – Know the basics
Let’s first get versed in the basics.
Blockchain falls under two categories – Permissionless and Permissioned. The former is a form of “public blockchain” which allows any party to participate in the network, while later are formed by consortiums or administrators who can predefine the rules of participation. The type of framework used by a blockchain engineer to design the system determines how the blockchain ledger can be updated and by who all.
Irrespective of the type of blockchain used, the logic is encoded using smart contracts. Smart Contracts are a collection of code on the blockchain that enables automatic execution of contracts for transactions without the need for any manual intervention. An example of web smart contracts is the automatic generation of invoices as soon as payment is made with the delivery of goods or services.
Smart contracts are usually the most vulnerable points in blockchain susceptible to cyberattack or tech failure, which necessitates robust testing for potential risks.
The following are some myths and risks associated with blockchain technology.
5 Myths and Inherent Risks of Blockchain Technology
- Blockchain can solve every problem!
Blockchain at its core is a database and a computational platform. While it has many advantages over conventional techs, at more times than you might think, organizations would find it more appropriate to use conventional technologies over blockchain technology. CISRO says, “If a system is used only within a single organization, it is almost never advisable to build it on blockchain technology.” As per critics, blockchain frameworks implemented within a company or single unit are mere “needlessly fancy” forms of a shared database that can be executed via other simpler forms.
- It is a 100% trustless system!
Since blockchain removes the need to trust a single third party to execute transactions, sometimes it’s referred to as a trustless system. However, it is not complete truth that blockchain “eliminates” the need to trust. What is trusted is the software and mechanism driving this process. Users are still exposed to the risks in their use of this technology. In traditional centralized systems, we trust a single third party, while in blockchain, we mainly trust the “consensus mechanism”. However, if the system fails, users may lose control of their data or assets.
- It is secure!
Three properties classically constitute security – confidentiality, integrity, and availability. Although Blockchain ensures “only authorized reading”, thereby ensuring confidentiality, and “only authorized valid writing”, thereby confirming integrity, different use cases may need more or less of these security properties. For instance, in the case of “public blockchain,” any member involved in the process can obtain a full copy of transactions and use it without any restrictions whatsoever.
This has prompted blockchain engineers to think of specific techniques like encryption, or holding data off-chain, to achieve a higher level of privacy and confidentiality.
- Smart contracts are full-proof and legal!
Smart contracts are self-executing codes representing contracts, executed with “if-then” commands. They provide a quick and authenticated manner to execute agreements. As also mentioned before, they are the most vulnerable points in the blockchain framework, and almost not legally enforceable (yet).
Nonetheless, despite this shortcoming, they can provide some form of documentary evidence of a transaction.
- If it has benefits, it will be adopted!
Although the logic should work, it doesn’t. There are many challenges to the adoption of blockchain technology. One of its inherent limitations lies in its non-suitability to handle the high velocity of data or Big Data. However, for many use cases, this limitation doesn’t pose a threat. Another issue is blockchain at present isn’t scalable, and ironically enough its benefits can be truly realized with large-scale adoption. The underlying problems include huge space, financial resources, and electricity consumed in the process. Finally, incumbent organizations for whom Blockchain is a competitor may create friction toward its acceptance.
It is not to say Blockchain doesn’t have many brilliant use cases, but many still are in the theoretical or pre-PoC stage, being worked upon by practitioners. They may soon be overcome in near future.