Is the blockchain good for security?

The blockchain is now being hyped as the solution to all inefficient information processing systems

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Enterprises do have a lot of flexibility in how they deploy the blockchain, said Nigel Smart, co-founder and adviser at Dyadic Security.

"If you wanted to deploy a block chain in a system like a commercial banking system, you wouldn't use it the way Bitcoin uses the blockchain," he said. "The general idea is you can put anything you want on the blockchain. If you want anonymity, you could put that on. If you want public accessibility, you can put that in."

But not all the proposed applications make common sense, he added.

For example, some blockchain proponents suggest that the technology could eliminate escrow accounts.

According to Dan Wellers, digital futures lead in SAP's marketing division, a company looking to buy, say, a million widgets could put the order into the blockchain, the widget factory would invest in the new plans and machinery needed to make the widgets, and when the order was complete, the contracts would execute automatically.

This is possible, agreed Smart, if the money for the widgets was to be locked away inside the blockchain in Bitcoin or some digital equivalent.

Someone else still has to validate that the contract has been fulfilled, but then once it does, the money could leave the blockchain automatically.

"The Bitcoin wallet itself is acting as an escrow system," Smart said. "But if you're transferring a large amount of money, if you put it into a traditional escrow account it earns interest, and if you put it in a Bitcoin account it doesn't earn interest."

Plus, Bitcoin's volatlity means that you don't know whether you'll end up with the same amount of money as you started with.

A more likely application would involve the sale of virtual goods, Smart said.

For example, the blockchain could contain a song file, and the smart contract to release it once the payment for it has cleared.

"Anything digital can go on the block chain," Smart said.

Compliance and enforcement

Central clearinghouses do more than just move information around, however.

Even if blockchain technology does prove to have advantages over other modern systems, there are still issues of compliance, regulations and enforcement that will need to be addressed.

For example, centralized utilities often have to comply with rules about what kinds of public access they provide to their systems. Do groups of companies setting up private blockchains have to comply with the same rules?

Other regulatory issues include clarity over jurisdictions and how to comply with know-your-customer and anti money laundering laws.

There's also a large network effect associated with some platforms. For example, according to Autonomous Research, card networks currently process around 2,000 transactions per second and do so very cheaply, meaning that merchants have little incentive to switch.

Finally, one unintended consequence of full automation is the lack of circuit breakers. The current settlement process provides more opportunity to hit the brakes if something goes wrong.

According to the DTCC, the blockchain not only has fundamental technology challenges related to scalability, latency, performance, and security but many operational problems as well. For example, logging and monitoring are essential for enterprise environments, but have not yet been addressed.

This story, "Is the blockchain good for security?" was originally published by CSO.


Copyright © 2016 IDG Communications, Inc.

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