Updated: May 10
Blockchain is spreading like wildfire and disrupting every industry. The number of businesses interested in Blockchain technology continues to grow with each passing day. In fact, it’s attracting retail titans like Walmart and historical banking institutions like JP Morgan. However, security is a major worry for anyone considering employing Blockchain technology. Clearly, the Blockchain enables frictionless asset and data transmission and reception. However, the question is: are these transactions secure?
Blockchain security is important to everyone, not just CTOs and CEOs. For instance, Cryptocurrency, NFT, and other digital asset traders want to know if their investments are safe. Many businesses and individuals are wondering how the Blockchain is secured if there is no central entity controlling and securing it? Well, don’t worry too much; we are here to clarify all your questions. In this article, we are going to discuss how Blockchain security works along with the common security concerns in Blockchain. So, without further ado, let’s dive into it!
What Is Blockchain, And How Does It Work?
In simple words, the Blockchain is a distributed ledger that records all transactions made by network participants. Blockchain networks are supported by a network of computers (called nodes) located all over the world. It works on a peer-to-peer model allowing each node in the network to initiate or validate new transactions. An important thing to note here is that all Blockchains are not the same in terms of security and how they work.
Public Blockchains, such as Bitcoin and Ethereum, are "permissionless" in the sense that anyone with a computer and an internet connection can join the network. Meanwhile, Private Blockchains are “permissioned” and can only be joined with the permission of the controlling entity. We'll look at why the distinction between Blockchain types is important for security purposes later in the article. Right now, let's focus on the working of the Blockchain.
Blockchain doesn’t have a single central authority controlling the network, which makes it a "decentralized" system. This means each participant in the network has the same amount of power and authority as the next participant. Every time a transaction occurs, it is added to a block, which is then added to the Blockchain. When all other nodes in the network agree that the transaction is valid, the new block is added to previous blocks, forming a chain-like structure. The process by which nodes agree on the state of each transaction is known as "consensus."
How Is Blockchain Secured?
Because Blockchains are extremely secure, they are ideal for transactions requiring high levels of data integrity and safety. Blockchains, for example, can be used to securely transfer money, track charitable donations, secure records, conduct voting, etc. Blockchain security is achieved through a combination of cryptography, game theory, consensus mechanisms, and fail-safe design. Let's take a closer look at each of these components to see how they contribute to Blockchain security.
1- Cryptographic Hashing
Blockchains are referred to as "immutable" because they prevent the alteration of network transactions. These transactions could range from the exchange of digital assets to the transfer of digital data. We can thank cryptographic hashing for Blockchain's immutability and data security. Basically, hashing is the process of generating a fixed output (hash) from any size of data input using an algorithm called "hash function". The hash, in most Blockchains, is a fixed-length alphanumeric string.
The hash is totally dependent on the data of the block. Since each block has unique data, there is a unique hash for every block as well. That’s why the hash serves as a unique identifier for a block on the chain. No matter how many times you run the same data through the hash function, the result is the same hash. A change in the data of a block automatically generates a new hash. As a result, it's simple to tell if a block containing transactions has been changed.
Furthermore, the hash of each block contains the hash of the previous block. This is precisely why Blockchains are referred to as "hash-linked lists". This means that changing the hash of a block necessitates changing the hash of the preceding block and the one before that, all the way up to the first block in the chain. Rewriting blocks not only demands massive computing power, but it is also prone to failure.
This is because each node has a copy of the complete history of the Blockchain. So, if you make changes to a block, the nodes will notice the changes, and they will reject the changes right away. Hashing also ensures that funds spent in one transaction cannot be used again, preventing the "double-spending" problem that plagues cryptocurrency. Changing the information on Blockchain is only possible if you rewrite the whole history of the Blockchain, which is simply not possible with the current computational resource.
2- Public-Key Cryptography
Cryptography is useful for safeguarding Blockchain wallets in addition to protecting the immutability of Blockchains. Wallets are used to store digital assets such as cryptocurrencies, non-fungible tokens (NFTs), and anything else created and transferred on the Blockchain. Users receive a public key and a private key when they create a wallet. The public key is like your bank account number that you can share with others to receive assets on the Blockchain.
Meanwhile, the private key is like the password for your bank account that gives you access to all your assets in your wallet. As the name suggests, only you know your private key. To prove asset ownership, every transaction must be signed with a private key. Since only you have access to the private key, no one can access your wallet and move funds or other assets without your permission. This serves as the ultimate proof of ownership and prevents malicious actors from transacting assets they do not own.
3- Consensus Algorithms
Consensus algorithms enable Blockchain participants to agree on the validity of transactions and the true state of the Blockchain. It won’t be wrong to say that consensus makes the Blockchain ledger a reliable and secure record of information. Basically, each node in a Blockchain network must confirm the validity of each transaction. This makes it more difficult for anyone to engage in malicious behavior and get away with it.
Furthermore, nodes must agree on a single, shared history of the Blockchain. This means there cannot be more than 1 version of a Blockchain. This makes it impossible to change records without being detected. Since Blockchain is decentralized and doesn’t have a single point of failure, it’s extremely difficult to control the consensus mechanism. Different Blockchains use different consensus mechanisms. For instance, Bitcoin and Ethereum use a consensus mechanism called Proof-of-Work. On the other hand, modern Blockchains like Solana, Cardano, and Ethereum 2.0, use a Proof-of-Stake system.
4- Cryptoeconomics (Game Theory)
When Satoshi Nakamoto created the first Blockchain, people raised questions about how to ensure that the participants in the network would act honestly. Remember that the Blockchain is decentralized, which means there is no one to wield the big stick and prevent malicious activity. Cryptoeconomics is based on game theory, a field of study that attempts to predict the interactions of different participants in a situation with defined rules and outcomes.
When applied to Blockchain networks, game theory can be used to encourage honest behavior by providing adequate incentives. Depending on the Blockchain, Cryptoeconomics works differently. Bitcoin employs a Proof-of-Work system in which nodes (called miners) must spend some resource (in this case, electricity and computational power) before confirming transactions. This rule is enforced by assigning complex equations to miners in exchange for the ability to add new transactions to the Blockchain.
Bitcoin mining's computationally intensive nature disincentivizes malicious activity. This means any malicious actor must spend a significant amount of time and money (on electricity and computational power) on dishonest activities (like confirming invalid transactions). Even so, the chances of success are bleak. Furthermore, dishonest miners lose block rewards for valid transactions. Our hapless hackers will now waste electricity and lose money while attempting to hack the Bitcoin Blockchain.
The next-generation Blockchain, such as Ethereum 2.0, Solana, and Cardano, uses the Proof-of-Stake system. The PoS system works almost similarly to the PoW system. Just like PoW, PoS punishes bad behavior and rewards honest activity. However, there's a slight addition to the PoS system that discourages dishonesty further. Before validating transactions, nodes must "stake" some cryptocurrency, raising the barrier to entry. If nodes (called validators) confirm valid transactions, they are rewarded with cryptocurrency. However, if they broadcast an invalid transaction and other nodes reject it, they forfeit both the staked funds and the expected rewards.
The Most Common Blockchain Security Issues
While Blockchain security is impressive, the possibility of a breach cannot be ruled out. The following are the most common Blockchain security threats:
1- 51% Attacks
If a group of hackers gains control of a significant portion of the computing power in a Blockchain network (at least 51 percent of the nodes), they may be able to take over the entire Blockchain. In theory, this is the most realistic scenario in which a Blockchain can be hacked. It is known as a 51 percent attack. However, for the reasons discussed under "Cryptoeconomics", it is difficult to orchestrate a 51 percent attack. Bitcoin has over 15,000 nodes (computers) on its Blockchain, while Ethereum has over 2,000 nodes. A 51 percent attack is impractical and costly due to the sheer amount of resources required to take over half of either network.
It's worth noting that Bitcoin and Ethereum both benefit from a strong network. Smaller Blockchains with fewer nodes are more vulnerable to attacks because breaching their network requires fewer resources. Some notable Blockchains that have experienced 51 percent attacks in the past include Bitcoin SV, Ethereum Classic, Bitcoin Gold, Verge, and Vertcoin.
Private Blockchains are an easier target for the 51% attack because they have fewer participants. While controlled access improves security in a private Blockchain, an insider can easily seize control of the Blockchain. This is an important consideration for businesses thinking about using private Blockchains for enterprise-level transactions.
2- Distributed Denial-of-Service (DDoS) Attacks
A distributed denial-of-service attack occurs when cybercriminals overload a Blockchain network with transactions. Most Blockchain networks have a transaction limit that must be met, or the network will crash. While many people believe that Blockchain networks are immune to DDoS attacks, this is not the case. Solana is a prime example of how a DDoS attack by a malicious actor can bring down a Blockchain. On September 14, 2021, a coordinated DDoS attack flooded the Solana Blockchain network with up to 400,000 transactions per second. This brought the system down because validators couldn't keep up, and unconfirmed transactions clogged the network.
3- Attacks on Blockchain-Connected Systems
Aside from a 51 percent attack and DDoS hack, there are few other ways to attack a Blockchain. The majority of hacks reported in the news are not attacks on the Blockchain itself. Instead, hackers frequently take advantage of flaws at the point of contact between the Blockchain and the outside world. This involves attacking third-party apps, software clients, and other ways to interact with the Blockchain. Here are some examples:
Hot Wallet Hacks: Many hackers target hot wallets containing digital assets like crypto, NFTs, etc., on different cryptocurrency exchanges. Since hot wallets are connected to the internet, targeting them and hacking them is comparatively easy. To protect people’s digital assets in their wallets, exchanges should ideally transform hot wallets into cold wallets. It’s because cold wallets are offline, and since they are not connected to the internet, their chances of getting hacked reduce significantly.
Stolen Wallet Keys: The private keys of a user could also be compromised and used to transfer assets without the user's knowledge. Traditional methods such as phishing have proven to be surprisingly effective in persuading users to unwittingly give away their private keys. This grants bad actors unrestricted access to wallets, allowing them to steal your cryptocurrency and other assets.
Smart Contract Code Exploitation: Smart contract flaws can allow hackers to compromise Blockchain-based decentralized applications (dApps). In such cases, the smart contract's security, rather than the Blockchain's security, is called into question. The recent Wormhole hack is a prime example of how bad smart contract code can lead to issues.
Blockchain continues to be one of the most secure means of transferring assets and data. Breaching a Blockchain network is nearly impossible when the right elements are in place, i.e., cryptography, cryptoeconomics, and consensus. However, it’s important to note that all Blockchains are not created in the same way. Everything from the consensus algorithm and cryptoeconomic structure to the size of the Blockchain's network can have an impact on its security. Finally, users of Blockchain-connected applications such as crypto exchanges and dApps must understand that the Blockchain's security does not apply to these services. As a result, it's critical to put in place additional safeguards to keep them safe.
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