Advisory Note

Blockchain and Risk

A blockchain is a data structure, originally used by bitcoin, that maintains a growing list of transaction records in a way that is extremely resistant to tampering. This technology is seen by many as the basis for creating distributed ledgers for a wide range of applications. This report considers the risks associated with the use of this technology and recommends an approach to managing these risks.

Mike Small

sm@kuppingercole.com

1 Management Summary

A blockchain is a data structure, originally used by bitcoin, that maintains a growing list of transaction records in a way that is extremely resistant to tampering. This technology is seen by many as the basis for creating distributed ledgers for a wide range of applications. This report considers the risks associated with the use of this technology.

Distributed ledgers offer a range of potential benefits to both private sector organizations as well as government and public services. They can be widely distributed and yet at the same time precisely controlled. They reduce costs by automating the processes involved in verifying and rapidly publishing authorized changes. They are structured in a way that makes it extremely difficult to change or tamper with existing authorized content. They can be the basis for new kinds of applications like smart contracts. KuppingerCole will publish a series of research reports around these opportunities and their potential benefits.

However, every new technology is claimed to offer unparalleled benefits, many of which do not materialise in practice. Equally some organizations that fail to exploit the new technologies find to their cost that they have lost their market. The constant challenge is to identify and quantify the real potential benefits and balance these against a realistic view of the potential risks.

This report provides a review of blockchain and its underlying technologies together with a description of how these can be used to create distributed ledgers. It explains the risks that are mitigated by the use of blockchain. It then provides a detailed list of the risks associated with the use of blockchain.

These risks are categorized as being:

  • Critical risks – with a high likelihood and a very high impact have the potential to disrupt transaction processing or damage integrity.
  • Important Risks – with a very high impact but a lower likelihood could damage the business using the system.
  • Risks needing consideration - some of these, like the long term durability of the cryptographic algorithms used, may not crystalize in the short term but could pose longer term problems.

Each risk is described together with an estimate of its likelihood and impact together with comments on how it could be mitigated.

On the basis of this KuppingerCole recommends that organizations should put in place an action plan to:

  • Identify the opportunities for the exploitation of blockchain technology.
  • Quantify the expected benefits and potential risks from these.
  • Choose an appropriate delivery architecture and platform.
  • Recommend the actions needed to manage the risks identified based on the detailed recommendations in this document.
Continue reading...
Read the full report and get access to KuppingerCole Research for 4 weeks.
Start Your Free Trial
Already a subscriber? Click here to login.