Adequate handling of risks posed by the application of blockchain is critical to its successful adoption. Are your enterprises well-prepared for those new risks?
Undoubtedly the technology is more than an application and it is integrated into the organization’s basic infrastructure, as with Distributed Ledger Technologies (DLT). In the near future, DLTs have the potential to provide the backbone of many fundamental systems. DLT is defined as a peer-to-peer value-transferring system utilizing a consensus technology that is fault-tolerant with distributed databases.
Blockchain is being hailed as the next risk management technology. As the technology matures and various potential use cases near commercialization, the industry would be wise to start concentrating on a less-mentioned question: “Do blockchain-based business models expose the firm and market to new sorts of risk?”
Two types of blockchain technology and their inherent risks
The application of blockchain technology is a subset of DLT, in which the consensus protocol generates a daisy-chained, immutable ledger of all transactions that are shared by all participants. Every participating node has an exact copy of the data, and the updates are synchronized across nodes via a consensus procedure. Without the need for intermediates, this technology enables near real-time value transfer between participants.
Any value transfer between two parties is recorded in the blockchain ledger and visible to all parties. All transactions on the ledger are immutable and irreversible thanks to the cryptographic consensus mechanism. Blockchain’s potential to help firms reduce — and in some cases eliminate — the risks posed by conventional systems has piqued the interest of risk practitioners across industries.
There are 2 main types of blockchain technologys including permissionless and permissioned blockchains. Permissionless blockchains enable anyone to join the network without being vetted, whereas permissioned blockchains are created by consortiums or an administrator who reviews an entity’s involvement in the blockchain framework. While blockchain technology has the potential to increase efficiency or lower costs, it also contains several unexpected risks.
Lists of risks arising from blockchain adoption
To realize the benefits of modern technology, businesses first identify the dangers and implement proper protections. If the dangers associated with adopting new technology are not mitigated, all of the advantages may be lost. We divide blockchain risks into 3 primary categories: Standard risks, Value transfer risks, and Smart contract risks
Institutions are exposed to risks that are similar to those connected with current business operations, but blockchain technology brings subtleties for which organizations must account: Strategic risk, Business continuity risk, Reputational risk, Information security risk, Regulatory risk, Operational and IT risks, Contractual risk, Supplier risks.
The application of blockchain technolgy allows for peer-to-peer value transmission without intermediates. In the system, the exchanged values may be assets, identity, or information. The interacting parties are exposed to new risks that were previously controlled by central intermediaries under this new business model. For example, consensus protocol risk, key management risk, data confidentiality risk, liquidity risk are all the concerns of all the enterprises during the adoption of blockchain.
Smart contracts have the ability to encode complex financial, legal agreements, and businesses on the blockchain, leading to the danger of one-to-one mapping of these adjustments from the physical to the digital platform. Furthermore, because smart contracts rely on external oracles to trigger contract execution, cyber security threats tend to rise.
By disintermediating central entities or processes, boosting efficiency, and generating an immutable audit record of transactions, the blockchain peer-to-peer system enables to alter present business operations. the application of blockchain technology has the potential to reduce expenses, shorten contact or settlement periods, and increase transparency for all parties involved. Because many transactions are peer to peer, this transformative paradigm has the potential to change the way financial institutions do business.
While the advantages are obvious, there is a number of concerns that this young technology may bring. As blockchain technology matures, our understanding of it and the hazards it poses, as outlined in this article, may change and evolve. As a result, it’s critical for all businesses to keep an eye on the progress of this technology and how it’s being used in diverse use cases.
akaChain is backed by FPT Software, a globally leading technology, and IT services provider. It is an end-to-end, permissioned, multi-chain network based on the Hyperledger Fabric. Since its establishment in September 2018, akaChain’s product has assisted many enterprises, from SMEs to Fortune 500 firms, to transform with distributed ledger technology. The company provides a broad range of permissioned blockchain-based products and services in multiple sectors, including retail, supply chain, banking and finance, insurance, shopping mall management, etc. to transform with its distributed ledger technology. For more information, please visit https://blog.akachain.io/
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