Join Jonathan Reichental for an in-depth discussion in this video The risks of blockchain, part of Blockchain: Beyond the Basics.
- As an open-source project, Bitcoin is still evolving. As we've also discussed, alt-coins and alt-chains are forking from the original code and taking these technologies into new territory. The Ethereum network, barely over two years old, is still considered in development, although practical solutions already deployed. We have enough evidence and use cases that this is compelling and disruptive technology, but we must view it through the lens of speculation.
There are risks for just about everyone participating, whether it's banks incorporating blockchain cross-border transfer tools, experiments with buying and selling peer-to-peer solar-based energy, Solidity developers building smart contracts for the Ethereum platform, or the millions of cryptocurrency investors in bitcoin, ether, and alt-coins. There's little settled in the blockchain space. That said, large participation and billions of dollars of investment are signals of something very real.
In Blockchain Basics, we explored some of the risks in blockchain technology today. These risks included those to the financial services industry, of disrupted business models, and reduced revenue. We also looked at the risks of not exploring it, perhaps missing a first mover advantage. We discussed how many people are disengaged because blockchain technology is difficult to understand or they simply haven't been educated on the basics, and finally we acknowledged that openness, a core quality of blockchain, can also be a liability.
These issues persist and will continue to improve over time, but let's explore some recent risk-based events that need to be addressed. We'll begin with Bitcoin hacking. There are several ways this can happen; we'll look at two. The first involves public and private keys. We acknowledge that the public key is just that, public. It can be shared freely and poses no risk. However, a private key should only be known to the user. Your keys are typically stored in an online wallet but a private key can be stored anywhere, written down, or on cloud-based storage.
If a hacker gains access to it, they have the keys to your kingdom. If you lose your private key, it's game over. So protect it well. The second hack exploits bitcoin miners. You'll recall that bitcoin miners use increasing amounts of computing power to solve a predetermined hash. The first miner to solve the hash is rewarded with newly minted bitcoins. As time passes, the has algorithm increases in complexity and requires more computing power, so it becomes less accessible to small players.
There have been several successful attempts by hackers to commandeer a miner's computing power to make the blockchain network believe the winning miner is the hacker. A variation of this hack is the deployment of malware that enables the hacker to use the processing power of private computers, perhaps yours, as part of a mining pool. Criminals have launched a variety of attacks against Bitcoin. As a cryptocurrency, bitcoin and many others are being traded.
As a result, several cryptocurrencies have seen their values skyrocket. Criminals used a distributed denial of service attack to make several bitcoin exchanges unresponsive. By interrupted core exchanges, criminals are altering the dynamics in which trading is taking place. Done right, they use the DDOS attack to profit from the change in currency value. With so many participants now in the Bitcoin and alt-coin ecosystem, we see the emergence of a range of new providers, coin traders, providers for mining tools, and cryptocurrency escrow services.
For many, it will be difficult to recognize legitimate services versus scams. Recent criminal activities have involved mining opportunities that amounted to nothing more than a Ponzi scheme. In the world of cryptocurrencies, scams abound. In Japan, there was an incident involving a bitcoin exchange called Mt. Gox. At one point, it handled 70% of all global bitcoin transactions. In 2014, it suspended trading, closed its website, and filed for bankruptcy.
They announced $450 million worth of bitcoin were missing. While some were recovered, the loss was attributed to theft directly from the Mt. Gox wallet. The case continues. Another incident was the first formal exploration of the distributed autonomous organization, or DAO. A DAO offers the disruptive notion of an organization without leadership, without hierarchy, and without a specific location or headquarters.
As a blockchain-enabled organization, the DAO claimed to be completely transparent. Everything was done by the code, which anyone could see and audit. The DAO was intended to operate as a hub that disperses funds in ether to projects. By May 2016, the DAO had raised over $150 million from over 11,000 investers. In June 2016, users exploited a vulnerability in the DAO code that enabled them to siphon off one-third of the funds.
Some efforts to recover the money were successful albeit controversial. The exploit was somewhat useful to learn from and thus evolved the Ethereum platform. We'll need failures in order to improve the technology. In addition, the idea of a DAO will certainly continue and it's one of the most stunning possible outcomes of distributed ledger technology. The biggest risk in the medium term is whether blockchain technology will continue to mature, whether confidence will remain high, and the ecosystem of participants continue to invest.
In each of these areas, questions remain. From a technology perspective, we're still in the early days. Performance and scalability are still limitations. Right now, the market is hot and there are billions of dollars of investment. It's a good sign. We'll want it to continue if blockchain is going to be the significant disrupter so many of us predict. Finally, with big risk, there are often big rewards. Those organizations that commit to learn about the technology, experiment with it, participate in the innovation, and are in the right place at the right time may realize a significant upside.
Each organization and each leader will need to evaluate their appetite for risk.
- Blockchain basics
- Public and private keys
- How blockchain enables bitcoin
- Blockchain and the electrical grid
- Blockchain and identity management
- Risks of blockchain