Is the blockchain good for security?

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(Source: Stockfresh)

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4 April 2016 | 0

Overstock was one of the first online retailers to adopt Bitcoin in a big way. Now it is become the first major company to issue stock on a trading platform powered by the blockchain.

The blockchain is a distributed file system where participants keep copies of the file and agree on changes by consensus. The file is composed of blocks, where each block includes a cryptographic signature of the previous block, creating an immutable record.

“Blockchain trading is much more secure than the current system,” said Judd Bagley, director of communications at Salt Lake City-based Overstock.com. “The distributed nature of the network that verifies the integrity of the transactions and associated account balances makes a successful attack mathematically impossible.”

Overstock used the t0.com stock trading platform, which it owns. Up to a million common shares will be issued on t0.com, and up to a million preferred shares will be issued on the traditional exchanges.

“There may be no software that has been better proven, from a security standpoint, than Bitcoin,” Bagley said. “Building a stock trading platform atop such well proven software should leave all parties feeling very confident, from a security point of view.”

In addition, he said, settlement times are reduced from three days to 10 minutes, settlement costs are cut by 80%, and counterparty risk is eliminated because the cash and assets are accounted for ahead of time and instantly swapped.

Finally, the blockchain is completely transparent, he said, and cannot be changed.

“Put transparency and immutability together and you have a dream scenario for regulators, auditors and compliance officers,” he said.

And it is not just stock trading. The blockchain is now being hyped as the solution to all inefficient information processing systems, such as recording of property transfers, escrow services, and even legal contracts.

But Bitcoin is not without problems. The cryptocurrency has proven to be extremely volatile and popular with criminals. Regular users have lost millions to theft, the FBI is sitting on stockpiles of confiscated Bitcoins, and some of the members of the Bitcoin Foundation, created to legitimate the currency, are now in jail or on the lam. In addition, the Bitcoin system is slow to process transactions and is facing significant scalability issues.

Are any of these problems endemic to the blockchain itself? And if you are looking to eliminate an old, inefficient manual or batch-based process, the blockchain may be better — but is it better than other modern types of data structures? For example, the blockchain lends itself well to peer-to-peer systems but is not necessarily a good tool for individual enterprises.

“If you’re the only participant, you don’t need a block chain — you just need a database,” said Prakash Santhana, director for payments risk and integrity at Deloitte Advisory at Deloitte & Touche LLP

More Bitcoin, more problems
Peter Williams, chief edge officer at Deloitte’s Centre for the Edge, calculates that each Bitcoin transaction costs roughly $6 in hardware and energy, and consensus approval of each transaction takes about 10 minutes.

That kind of performance does not necessarily compare well to competing technologies. But some of this is due to the way that Bitcoin uses the blockchain.

“Bitcoin throughput is limited,” said Mance Harmon, senior director of labs at Ping Identity. “To increase throughput means that you need a business relationship in place, and more trust between peers.”

That is very much possible when a blockchain is used by, say, a limited group of business partners.

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