Chapter 6 – Risks and Challenges of Blockchain Technology
One of the major draws of blockchain technology is also one of its most significant challenges. Currently, there is very little regulation with regards to what is and isn't allowed in the blockchain space. Because of this, there have been numerous instances of hackers being able to make off with millions of dollars of investor money because of loopholes in the online blockchain systems. Despite the promise of security on the current blockchains, there are teething issues that hackers are taking advantage of to the detriment of every blockchain user.
Recently, there was a case with Enigma, a decentralized platform that was preparing to raise money through an ICO. Hackers were able to hack Enigma's website and numerous social accounts
successfully. This allowed the hackers to send out spam to Enigma's community and make off with almost $500,000. The Enigma project was launched by a group of MIT graduates, who sent out invites for people to join the Enigma community. The hackers grabbed money from those who joined the company's official mailing list and Slack group. In all, there were around 9,000 users and participants who were affected by this security breach.
The hacker's effectively posted messages on Slack altered the official website and spoofed emails to the community list to make it look like the company was making a formal request for money. Members of the community responded by sending money that was deposited directly into the hacker's crypto wallet.
Last year there was a similar hack but on a much larger scale. When the Decentralized Autonomous Organization or DAO that was built on Ethereum was hacked and resulted in a loss of $50 million to hackers.
The DAO was supposed to be a decentralized investment fund where decisions wouldn't rest on just a few partners, but rather anyone who invested in the fund would have a vote in which companies or projects the company should invest in. It was set up so that the more that you contributed, the more votes you got.
Since the fund was built to be distributed, no one could take the money and run. Unfortunately, due to human error and programming errors, hackers were able to exploit the system to receive a $50 million payday, which has of yet been recovered.
Another example of the challenges facing blockchain technology comes from a company called OneCoin. Recently, a company known as Gnosis sold $12..5 million worth of a token called GNO in just over ten minutes. The sale was intended to pay for the development of an advanced prediction market. The initial coin offering, ICO, received rave reviews across the global press.
On that same day, a company called OneCoin, based in Mumbai, India, was in the middle of a sales pitch for its own digital currency when their offices were raided by financial enforcement officers.
In the end, eighteen OneCoin reps were jailed, and more than $2 million in investor funds were seized. Multiple authorities describe OneCoin, which was being touted as the next bitcoin, as a Ponzi scheme. By the time the offices in Mumbai were raided, the company had already moved at least $350 million in scammed funds.
Since there are no checks and balances to govern the execution of ICOs, if you are going to invest in a coin, you need to ensure that you aren’t investing in any random idea that could turn out to be a scam.
Currently, there are significant hurdles in the way of formally legalizing and regulating crypto trades. Similar challenges exist with market growth and adoption. Some of the issues surrounding blockchain include, what kinds of tax structures are right for blockchain markets, how to trace and aggregate funds, and where will spending and income information come from and how it will be gathered. As long as these problems remain question marks on the policy boards of decision makers, widespread adoption of blockchain technology will be difficult.
However, there is some promise for the future of blockchain technology. South Korea and Japan have made significant advances recently that will allow for legal bitcoin transactions, and various applications have opened investment channels in the blockchain space to traditional investors. These advancements have led to an influx of funds to different blockchain companies, which, in turn, have been able to invest in growth, research, and the promotion of their particular blockchain services.
Risks of Blockchain Technology
As a new technology, resolving challenges like transaction speed, the verification process, and data limits are standing in the way of making blockchain widely adopted technology. The regulatory status of blockchain projects is also a risk of blockchain technology and is currently uncertain.
If financial institutions and governments don’t buy into the idea of blockchain technology, or if it is pushed away because of a lack of clear guidelines on how the industry should be regulated, blockchain will never gain the widespread adoption that investors and experts are hoping for, leaving it to be a novelty idea and nothing more.
The mining of blocks is highly energy intensive and is becoming even more expensive with the creation of each new block on the chain. There may end up being a limit to how much miners are willing to continue to spend to solve mathematical puzzles in order to earn a few bitcoins as their reward.
There are also cybersecurity and integration concerns that will have to be addressed before the general public will be willing to entrust their personal data to a blockchain solution. This also goes for getting the go-ahead from any body of users or a Board of Directors in order to make significant changes to or even completely replacing an existing system.
Finally, there is the problem of social and cultural adoption of blockchain technology. Blockchain represents a complete shift to a decentralized network. This requires a significant buy-in of all users and operators on the network. Also, since it is such a significant development, it is not entirely understood by a majority of the population. Will all of these risks and hurdles, it may be several years before we see widespread adoption of blockchain solutions.