New report warns big tech firms about risks associated with blockchain; experts react

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Amid the growing adoption of blockchain technology by big tech firms at a global level, a new report by the Pentagon has raised questions on the decentralisation and security aspect of the technology, warning firms to carefully review all risks before investing in it.

The report, “Are Blockchains Decentralized? Unintended Centralities in Distributed Ledgers”, commissioned by the Pentagon and released a couple of weeks ago, notes that big tech is at a critical moment, with many top companies already heavily investing in blockchain technology.

Big tech companies, including Meta, Spotify, Paypal, Twitter, Google, Apple, Alibaba, and Microsoft, among others, are pivoting to Web3 and blockchain technology. Not only big tech, the new report also comes as a warning for a wide range of sectors, including the security, fintech, big tech and crypto industries, which continue to grow.

The report stated that blockchain is not decentralised, is vulnerable to attacks and is running outdated software. It further said that a subset of participants can “exert excessive and centralized control over the entire blockchain system.”

The Pentagon’s research arm, Defense Advanced Research Projects Agency (DARPA), engaged the security research organisation Trail of Bits to investigate the blockchain.

Trail of Bits, which focussed on Bitcoin and Ethereum majorly, said that it only takes four entities to disrupt BTC and only two to disrupt ETH.

The organisation also identified outdated and unencrypted software and blockchain protocols.

While the adoption of crypto has increased globally, the volatility of the sector cannot be ignored. The market faced a major setback when Terra’s Luna dropped to zero. Cryptos continue to be affected by the global economy, supply chain problems, federal interest hikes, inflation and a looming recession.

In this new age of digital finance, crypto and blockchain are largely entwined and security risk remains one of the main challenges for the industry. This is not the first time that a study has challenged blockchain technology.

A Deloitte report has also phased out the various types of risks that the adoption of blockchain technology in business models can pose other than the security risk.

Firstly, the report noted that blockchain induces standard risk, i.e., it exposes institutions to risks that are similar to those associated with current business processes but introduces nuances for which entities need to account.

Second, the technology poses value transfer risk i.e. it enables peer-to-peer transfer of value without the need for a central intermediary, which exposes the interacting parties to new risks that were previously managed by central intermediaries.

Lastly, according to the report, blockchain poses smart contract risks i.e. smart contracts can potentially encode complex business, financial, and legal arrangements on the blockchain, and could result in the risk associated with the one-to-one mapping of these arrangements from the physical to the digital framework.

The Pentagon report adds more concerns about the blockchain and might shake the confidence of investors.

While industry insiders agree that blockchain is not completely decentralised, they also feel that investors should be risk-averse and continue with the adoption, as blockchain, like any other technology, comes with its pros and cons in business models. They, however, warn investors to take decisions after carefully examining the technology behind the preferred blockchain.

Raj Kapoor, the founder of India Blockchain Alliance, calls the decentralisation of blockchain platforms a “spectrum”, with some more decentralised than others. He further said that no blockchain right now is completely decentralised, citing examples of BTC being controlled by many groups, Ripple being owned by a company, and ETH developed by Vitalik, among others.

Adding to Kapoor’s opinion, Sharat Chandra, VP-Research & Strategy, EarthID, noted that from a consensus perspective, proof of work blockchains are relatively more decentralised than proof of stake ones.

However, Kapoor said that the average investor has traditionally been investing in centralised exchanges for decades so, from an investor perspective, the vulnerability, probability and risk exposure are pretty much constant.

“Blockchain technology is robust and it is my opinion that just like we have not much use for 24 carat gold — we need to alloy it and make it 18 carat or 22 carat before we can make jewellery — the same applies to blockchain… it needs to be alloyed a bit to be leveraged effectively,” Kapoor added.

Chandra stated that investors should be cognisant of "platform risks", and "technology risks" and pay heed to the "tokenomics" of protocol tokens. "Many investors aren't tech-savvy to evaluate the technical risks involved. They inadvertently make decisions without factoring in technical loopholes pertaining to new-age blockchain protocols."

He suggested investors should factor in the total developer activity of the platform, the number of unique wallet addresses added every month, and the total value locked to get a fair assessment of the blockchain protocol.

Abhijit Shukla, CEO and Director, Tarality, believes that blockchain is way safer than any other economic/banking model as one can verify every transaction over the ledger with a lower fee, at an instant transfer rate.

“Some scammers in the market find ways to carry out scams in blockchain technologies. If blockchains are not safe, then why are banks using blockchain technology? So, with technological advancements, the crypto sphere is going to bridge the gap in the near future,” he added.

As blockchain is largely associated with crypto transactions, experts have a view that harmful elements are always attracted to payments everywhere be it credit card frauds or industry frauds.

Reports have suggested that credit card and identity card frauds grew immensely during the pandemic.

Pratik Gauri, Founder & CEO of 5ire, noted that there may have been hacks at individual exchanges, but no one has yet made away with the remainder of Bitcoins or Ethereum.

“The main features of immutability and public availability of data is a great resource to develop trustless systems that provide not only a streamlined process but do it with great integrity,” he added.

Keshav Aggarwal, founder, Bitcoin Investor Community, said that risks are attached with all other assets, too, including stocks, property, etc. But the compliance and legal framework that comes with crypto puts an additional security patch on crypto dealing, he asserted.

“Cypto gives you more power to control your funds without the intervention of any third party. It can be risky for some and could be a blessing for others,” he added.