Solving Supply Chain and Security Problems with Blockchain Technology
In the last few years, blockchain has become a buzzword in the tech industry. The concept entered the public consciousness through Bitcoin, which uses a specific blockchain as a core component of its consensus algorithm. Back in 2017-2018, many experts were proclaiming “blockchain, not Bitcoin,” while today, Bitcoin’s latest meteoric rise and ensuing crash has flipped that narrative on its head. But while blockchain technology is often associated with cryptocurrencies, its application is powering the fourth industrial revolution and mainstreaming applications. In cybersecurity, blockchain technology can help improve security and resiliency, at a cost.
To understand blockchain-based cybersecurity, one must first understand some basic principles of how a blockchain works. A blockchain is one form of distributed ledger technology (DLT), meaning that it is used in distributed systems. Distributed systems offer greater resiliency than centralized systems since a decentralized network has no single point of failure, but that resiliency comes at a cost. Without a single source of truth for the network, reaching consensus can be difficult. A blockchain typically serves as part of that consensus mechanism—establishing a reliable record for the system to use.
Implementations vary between different blockchains, but in general, a blockchain takes some chunk of data and connects it cryptographically to the previous chunk of data, forming a chain of data blocks—a blockchain. That data can itself be encrypted using public-private key pairs so that only authorized users (or owners) can access the records.
Typically, each block of data includes a header, which summarizes the contents of the block. That header includes a cryptographic hash of the previous block’s header, and that hash forms the link between each block. Because each block builds on and explicitly references the contents of the previous block, a properly implemented blockchain is extraordinarily difficult to alter. In order to change a block’s data, every block after that block must also be edited to build on the new hash of the altered block. Consequently, older blocks are much harder to change than newer blocks.
The immutability and decentralization of a blockchain make it well-suited to certain applications. For example, financial institutions can benefit from unambiguous, cryptographically provable ownership records. Bank of America recently announced that it joined the Paxos network to speed up settlement times for stock trades, while JPMorgan has settled billions of dollars of transactions on a private version of Ethereum. From healthcare records to private genetic data, blockchain technology is also revolutionizing the medical industry. Legally, blockchain implementations could help businesses by providing a reliable, auditable data record.
As we digest the takeaways from the late spring 2021 crypto-crash, gas fees required to process transactions over Ethereum blockchain networks and environmental costs associated with Bitcoin mining need to be reexamined. But what are gas or transaction fees? While “gas fees” refers to the computing power required to securely execute a transaction on the Ethereum blockchain, they can be analogized to the transaction fees to process any crypto-currency transaction. On the Bitcoin blockchain, fees are required to pay the network’s miners to accept and verify a transaction.
While these gas fees and mining fees are an essential part of the security behind the scenes, they have become substantial deterrents to the growth of the digital asset marketplace. Startups that can create cost-savings in gas or mining fees to process transactions will be well-positioned to lead the next generation of blockchain security solutions.
If your company is considering implementing blockchain technology, consider carefully what information needs to be stored. My advice is to evaluate whether you need to use a blockchain. It is a powerful and useful technology, but it is not the right tool for every job, regardless of how popular it is. Unlike a traditional database, data stored on a blockchain effectively cannot be altered, so you need to make sure that whatever records you include compliance with all applicable laws and regulations. A mistake here could be extraordinarily difficult to fix. In some industries, the benefits will be well worth the risks. In other industries, the transaction costs need to first come down.
Some solutions to consider for industries where blockchain makes sense today:
-Bide your time. Wait it out. The market is evolving rapidly, decentralized and dynamic. With so many costs with no consolidation, new competitors are entering the market every day, and chances are that fees will reduce as a percentage of the transaction over time.
-You could also look for new blockchains or wrappers that “wrap around” existing blockchains to support more transactions, relieving congestion and offering lower fees.
-Partnering with value-priced wallets offering scaling technologies enabling lower fees is also an avenue to explore.
In the end, blockchain cybersecurity simply leverages the immutability and decentralization of a blockchain to make tampering with data more difficult while reducing centralized points of failure and giving users more control over their data. Ignore the hype, and evaluate whether this technology is right for your use case. Periodically reevaluate. This is a dynamic technology, and so is the market.
Louis Lehot is an emerging growth company, venture capital, and M&A lawyer at Foley & Lardner in Silicon Valley. Louis spends his time providing entrepreneurs, innovative companies, and investors with practical and commercial legal strategies and solutions at all stages of growth, from the garage to global.
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