One of the largest risks in the blockchain space is that of platform exposure. To simplify things first let’s briefly mention there are three main blockchain protocols in the market.
First is crypto currency - that are standalone tokens that sit on a blockchain to be used as a mode of payment/ exchange. Examples are Bitcoin, Litecoin, ZCash and Dash
Platforms - these are usually made for contracts, which enable other companies to build out decentralised DAP’s upon. Examples are Ethereum, EOS, NEO, Stellar Lumen
Decentralized Application Protocols (DAPs) are those blockchains/ tokens that sit on top of a platform - all ER20 tokens means DAPs made on the Ethereum blockchain fall into this however there are other DAPs being built on many other platforms
There are also private blockchain protocols that also fall into each of the above category’s however many of these will never be seen by the public but still may have exposure if they are built 'on top' of a DLT protocol.
Given the above, one HUGE risk is platform exposure. One of the primary tenants of blockchain technology is that the security is ‘un-hackable’. We have seen cases of DAPs that have been hacked - mainly due to coding issues, (the DOW) however we have not seen a major platform vulnerability yet. Unlike those who said the titanic would never sink we certainly feel this is a when, not if, situation. With so many companies starting to build out their platforms to compete with the current market leaders the pace of development is at breakneck speed. The rise of the ICO craze has supercharged this and companies are racing to not only launch tokens, but also to meet incredible timelines for deployment. Rushing and greed are always early indicators of pending disaster. A clear example of a little stumble recently was the screaming halt of EOS. Although it was not a hacking flaw exposing the technology, it was still an update which bought the entire blockchain to a halt.
A hack of a major platform could potentially cause a cascading effect on all DAPs using the protocol. In the case of the leading platforms this could affect hundreds or even thousands of projects on their chains!
This brings to light the issue of recourse as a consumer. One of the key limitations of the blockchain is that unlike centralized and controlled systems, due to the decentralized nature of blockchain technology, when things go bad, the consumer is really hung out to dry. We already know there are many ‘bad actors’ in the blockchain space and the level of trust that the general crypto market is affording almost all of the platform projects is incredible. Simply put, as most of the projects are built by communities in an open source methodology, it would only take one programmer to sneak past other watchful eyes, a back door that could be used to hack a token once it hits a significant market cap. Even if the hack was to cause network disturbances, so a short position could be taken by the hacker to profit from the resulting fear, the problem is significant for the space.
It is clear and understandable then, why Vitalik Buterin, the Ethereum figurehead, sends sends occasional messages that request calmness in the market. That difficult to implement changes to the underlying protocol to address the much needed scalability issues and blockchain speed, need to be well though out, meticulously developed, thoroughly tested. If a major hack to any top 20 token did occur, we could see a correction in this market like never before. We need to take note, we are not talking about hacks that have occurred in the past such as Mt Gox or the Korean exchange more recently, nor are we talking about blatant Ponzi schemes such as the recent BitConnect drama, we are talking about something much more fundamental and potentially damaging to the overall market.
Let us know your thoughts by commenting below. We are not technical advisors so please contribute if you know how this risk is being controlled and mitigated by leading projects.
