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NordXE, July 30 2022

The Risks of Using Blockchain and How to Mitigate Them

Blockchain is a new revolutionary technology whose recognition and importance are growing rapidly. While it has impacted many industries, the technology is still in its infancy in applications and use cases. Industry experts say, that in future blockchain technology will find massive applications in different sectors.

Unfortunately, no matter how excellent blockchain technology is, it's not without risks. These risks could be related to the technology, its implementation, legal, operational, finance, security, and investment, among other aspects of the blockchain. This article will discuss the risks associated with blockchain technology and a compliance plan that could help mitigate the risks.

The Risks of Blockchain Technologies

1. 51% chain attacks

Blockchain technology operates on consensus rules, and there's a slight risk that the majority can influence the outcome. In the crypto world, this group will mean a group of miners with more than 50% computing power, potentially affecting what transactions are being validated, added, or omitted in the chain.

On a POW (Proof-of-Work) network, 51% of system attacks will take the form of a rival chain, for instance, fraudulent transactions being created by malicious parties. Through their 51% majority computing power, these fraudsters can quickly build an alternative network chain that ends up being longer than the existing network. Since Nakamoto's consensus protocol operates on the principle that the longest chain wins, the fraudulent chain will continue forward.

That's the exact case that happened back in 2018 when there was a 51% double-spending attack on the Bitcoin Gold network. The fraudsters responsible for this walked away with millions of dollars from the attack.

2. POW vs. POS

Proof of Stake (POS) voting is currently working as the upgrade of the POW network. As we speak, Ethereum is switching to POS after using POW for the longest time. That's all thanks to the 51% attack back in 2018. However, POS isn't risk-proof. As a matter of fact, POS is somewhat more vulnerable to forks compared to POW.

Forks happen when the most significant stakeholders make a different decision concerning a transaction in the network compromising the block. This process leads to creating a new currency, which is why the POS trial was initially halted on Ethereum's network. But today, the POS network has already been launched, and we are days away from merging the old and new networks. The risk of forks on the Ethereum network is still there, but the benefits, scalability, and faster transactions, outweigh the risks.

How to Mitigate Blockchain Risks

Organizations considering using blockchain should be aware of many vulnerabilities, as with any newly developed technology. At this time, blockchain does not have any established standards that are globally recognized, nor are there any clear regulatory guidelines. Due to these circumstances, blockchain technology deployment at the enterprise level must be handled with caution.

To mitigate existing blockchain risks, you must examine a company's blockchain solution to see if it is well-designed and operationally efficient. Identify blockchain issues that could have a reputational or financial impact. And give enterprises a comprehensive perspective of blockchain technology, considering both technical and non-technical concerns.

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