Despite recent security hacks, blockchain technology comes with many security advantages compared to other technologies. While blockchain also has its flaws, it has the potential to be superior to what we are currently using.
Blockchain enthusiasts tout security or better “immutability” as a major advantage of blockchain technology. Superior security is treated as a fact in the blockchain world, no questions asked.
But how secure is the technology? And how does the security pledge fit to events like this year, when the cryptocurrency exchange Gate.io lost $200,000 worth of Ethereum classic?
Even worse, the attack was carried out by miners. It involved a double-spent, the worst thing that could happen to a cryptocurrency, as the attack directly at the core of the blockchain.
And that’s just one example. Gate.io has hardly been the first blockchain hack. Mt. Gox – nearly half a billion dollars were stolen; the DAO hack – $50 million lost. And there have been various smaller security breaches that have not made the headlines.
So, are we just a bunch of techno-nerds too fascinated with our own technology that we simply ignore those realities?
Decentralization, cryptography and consensus
Let’s review the basics. Security on the blockchain is achieved by three features: decentralization, cryptography and consensus.
Decentralization means no single entity owns the information.
All data on the blockchain is cryptographically hashed. That’s similar to password protection. What makes hashing special is that it’s impossible to reverse engineer. If someone changes data, the change will be visible to the entire network.
Consensus is the pre-determined principle that is used to validate data. If an actor wants to add information to the blockchain, it has to be verified by the network.
Prone to Human error
Despite these features, blockchain is still just a technology, designed by humans and thus prone to human error. Even the best-designed blockchain system can fail were humans are involved.
Smart contracts, for example, are used to automate tasks on a blockchain, but they can only be as good as the code they are written in.
Even though smart contracts are technically not part of the blockchain, they do interact with it. Thus, hackers can infiltrate poorly written code, alter it, and steal either money or information.
Human error, however, is an issue with every technology mankind has ever created, not just blockchain.
Let’s not pretend there were no security issues with banks. There have been more than enough bank hacks. Online banking and credit cards are certainly not bullet-proof either and regularly fall victim to fraud.
Many financial institutions and individuals have lost billions of dollars due to insecure systems. While blockchain is not perfect, bank’s current systems are far from being perfect.
Do we trust a central entity or a decentralized network?
In other databases, one central entity has perfect control over the entire set of data. That makes them more vulnerable to manipulation, as the entity in charge can be corrupt.
That said, blockchain networks can be corrupt as well. Blockchain critics regularly bring up the 51% attack. Rightly so. This is one of the main vulnerabilities of blockchain networks. If more than 50% of the network participants are corrupt, they can manipulate data. That’s what happened two weeks ago at Gate.io.
Besides technological aspects, it also comes down to the question in who we trust. Do we trust in a single entity, like a bank, or in the majority of network participants?
Digital wallet or electronic bank account?
Are blockchain systems perfect? No, but then no system is perfect. In theory, blockchain is more secure than other technologies.
But that’s the theory. In reality, blockchain technology is still in its infancy.
Other systems have been around for many years, so security providers have become more specialized and sophisticated. Also, financial institutions have large budgets which they can invest in their infrastructure security. Crypto exchanges are much smaller in size and do not have the same resources.
So, is your money more secure in a bank account than in a digital wallet?
Hard to say, for now. But in the long term, when the technology matures and gets backed by large corporations, blockchain systems have the potential to be way superior to what we are currently using.