Hey, everyone, welcome back to the course.
So now after going through different security and implementation considerations and issues related to
blockchain solutions, we will also go through the different risks which are associated with the blockchain
enterprise solutions.
Understanding these risks will help you to analyze how you are going to mitigate these risks and make
a solution which is much more adaptable for your enterprise needs.
So we have defined the risk into three major categories.
The first one is the current business model risk.
The second one is the new model business risk.
And the third one is going to be the smart contract risk inside the current business model risk, we
have labeled it into eight different risks.
The first one is a strategic risk.
Every firms need to evaluate whether they want to be at the leading edge of adoption or wait to adopt
until the technology matures.
Each of these options have varying levels of risks to business strategy.
Given the peer to peer nature of this technology, it's important for entities to determine the right
network to participate in as their business strategy could be impacted by the different entities participating
on the chain.
It could also be that the choice of the underlying platform could pose limitations in the services or
products that can be delivered via this platform Strategy risks can be tackled by performing proof of
concepts for your blockchain solution and determining how fit your blockchain solution will be with
your enterprise needs.
The second risk under current business model is regulatory risk.
Currently, across the globe, there is uncertainty around the regulatory requirements related to blockchain
applications.
Additionally, there may be regulatory risks associated with each use case, the type of participants
in the network and whether the framework allows domestic or cross-border transactions.
This could also include cross border regulations related to privacy and data protections.
Finra's Regulatory guidance calls for broker dealers to be cognizant of all applicable federal and state
laws, rules and regulations when exploring issuing and trading securities, facilitating an automated
actions and maintaining transactions on a network.
In this guidance, FINRa highlights DltS potential to affect various aspects of the securities market,
including market efficiency, transparency, post-trade processes and operational risks.
The third type of risk under current business model is a business continuity risk.
Blockchain technologies are generally resilient due to the redundancy resulting from the distributed
nature of the technology.
However, the business process is built on Blockchain may be vulnerable to technology and operational
failures as well as cyber attacks.
Firms need to have a robust business continuity plan and governance framework to mitigate such risks.
Additionally, blockchain solutions shorten the duration of many business processes and business continuity
plans should account for a shorter incidence response and recovery time.
The fourth type of current business model risk is related to operational and it risks existing policies
and procedures will need to be updated to reflect new business processes.
Additional technology concerns should include speed, scalability and interface with the legacy systems
while implementing the technology solutions.
Another risk part of current business model is the reputational risk.
Unlike fintech applications, blockchain technology is a part of core infrastructure and will have to
work seamlessly with the legacy infrastructure.
Failure to do so could result in the poor client experience and regulatory issues.
Moreover, reputational risk is also associated where blockchain is taken as cryptocurrency without
realizing cryptocurrency is a mere use case of the blockchain and blockchain technology holds much more
potential.
Another risk part of current business model is contractual risk.
There will likely be several service level agreements between participating nodes and the administrator
of the network, in addition to SLAs with service providers that will need to be monitored for compliance.
Contractual risks are to be maintained and followed as per the legal contracts, which is signed between
the service providers and service users.
Information security risk is also another type of risk under current business model.
While blockchain technology provides transactional security, it does not provide account security.
The distributed database and the cryptographically sealed ledger prevents any corruption of data.
However, value stored in any account is still susceptible for account takeover.
Additionally, there are cyber security risks to the blockchain network.
If a malicious actor takes over 51% of the network nodes for a duration of time, especially in a closed
permission framework, then they are able to attack the blockchain.
The last risk, which we have defined under current business model is the supplier risk.
Firms may be exposed to significant third party risks, since most of the technology might be sourced
from external vendors.
We need to list out all those risks associated with supplier and create the risk management plan to
mitigate the risk which are external to our services.
The second category of risks under risk management for blockchain is about new business model risks.
These new business model risk arises because we have utilized blockchain as a solution.
The first one under new business model risk is the consensus protocol risk.
The transfer of value in a blockchain framework occurs by the use of cryptographic protocol that arrives
at a consensus among participant nodes to update the blockchain ledger.
There are several such cryptographic protocols that are used to achieve consensus among participant
nodes for updating the blockchain ledger.
Each such protocol will have to be evaluated in the context of the framework, the use case and the
network participant requirements.
For example, the practical Byzantine fault tolerance algorithm requires parties to agree on the exact
list of participants and memberships in the system is set up by a central authority or close negotiations
in a proof of stake consensus protocol, it's possible for block generators to vote for multiple blockchain
histories, which may lead to consensus never resolving, and thus Ledger would not compete with the
transfer of values.
Another risk associated with new business model is key management risk.
While the consensus protocol immutably shields a blockchain ledger and no corruption of past transaction
is possible, it's still susceptible to private keys, theft and the takeover of assets associated with
public addresses.
Digital assets could become irretrievable in the case of accidental loss of private keys or theft of
private keys, especially given the lack of single controller or a potential escalation point within
the framework.
We need to make sure that our key and certificate stores are maintained securely with our enterprise
solution.
Data confidentiality risk is also part of new business model.
The consensus protocol requires that all participants in the framework can view transactions appended
to the ledger, while the transactions in a permissioned network could be stored in a hash format so
as to not reveal the contents.
Certain metadata will always be available to network participants.
Monitoring the metadata can reveal information on the type of activity and the volume associated with
the activity of a public address on the blockchain framework to any participant node.
We need to also provide in the services to protect the metadata and transaction information from other
participants who don't have the access to that transaction.
Liquidity risk is also part of new business model.
The Bank for International Settlements warned that the adoption of DLT, such as blockchain, may introduce
new liquidity risks in current business models, intermediaries typically take on the counterparty risk
and help resolve dispute dispute resolution in a distributed trust environment is a requirement that
will rely on pre ordinated arrangements between the parties.
The third category of risk under blockchain is the smart contract risk.
Smart contracts can potentially encode complex business, financial and legal agreements on the blockchain
and could result in the risk associated with 1 to 1 mapping of these arrangements from the physical
to the digital framework.
One of the risks, which is part of smart contract risk, is business and regulatory risk.
Smart contracts should accurately represent business, economic and legal arrangements defined between
parties in the framework.
The smart contracts that are defined on blockchain network will apply in a consistent manner to all
participants across the network.
Therefore, these smart contracts will have to be capable of exception handling and the consequences
of these exceptions in the form of a programmatic output on the blockchain framework will have to be
tested across the universe by all other smart contracts within the network for adherence to business
and legal arrangements and compliance with regulations.
Another risk, which is part of smart contract is enforcement of contract risk.
Currently, there is no legal precedent around the enforcement of a smart contract in lieu to a physical
contract, and there are no regulations governing smart contracts.
Also, as the data on the blockchain framework is immutable, care should be taken always to amend smart
contracts to avoid breaches of existing regulations by acting on the data from the past on the blockchain.
Legal liability risk is also part of the smart contract in a permissioned network.
The legal liability remains unclear for an improper, erroneous and a malicious administration of a
smart contract, resulting in a transaction with two or more entities on the network causing assets
to leave the network while those transacting entities.
We need to maintain the legal liabilities of how these assets can leave the blockchain platforms and
on what conditions these assets will be accepted back in the blockchain platform.
The last risk, which is part of smart contract risk, is about information security risk.
Smart contracts may be susceptible to security breaches and improper administration participant entities,
or the network administrator will need to have a strong governance and change control process to deploy
new or amend existing smart contracts.
There will also a need for robust incident management process to identify and respond to glitches in
smart contract operations.
Oracles are the entities that exist outside the blockchain framework but feed data to the network,
which could trigger the execution of smart contracts within the network.
The biggest risk to a blockchain platform may lie within these oracles, as these could be subject to
malicious attacks.
For example, oracles are the entities that exist outside the blockchain platform but feed data to the
network, which could trigger the execution of the smart contracts within the network.
The biggest risk to the blockchain framework may lie with these oracles, as these could be subject
to malicious attacks to corrupt the data being fed to the blockchain.
This could also cause a domino effect which could lead to the collapse of the network.
To conclude the blockchain risk.
We can take the blockchain as a peer to peer framework, which offers the potential to transform the
current business processes by disintermediating the central entities or processes and improving the
immutability and audit trail functionalities of the transactions.
This provides the opportunity to lower costs, decrease interaction or settlement times and improve
transparency for all the parties.
While the benefits are clear, there are myriad of risks that may be imposed by the nascent technology.
Understanding the blockchain technology and its associated risks discussed in this lecture may change
how you employ blockchain with your enterprise solution.
It's imperative for all organizations to continuously monitor the development of this technology and
its applications for various problem statements and use cases.
In the next lecture, we are going to learn about the design patterns related to blockchain applications.
These design patterns act as a common solution for some of the standard problems associated with designing
blockchain applications.
If you have any queries, feel free to contact us at info at weblogs.com.