Blockchain offers a way to efficiently store data, execute transactions, perform functions, and establish trust in an open environment. It is a breakthrough technology for cryptography and cybersecurity with broad use cases in banking, healthcare, supply chain, government services, etc. In synergy with artificial intelligence and big data, blockchain technology is being considered as the cornerstone for the next generation financial services.
Blockchain security is guaranteed by the use of sophisticated cryptographic algorithms and distributed computing. In parallel to its positive impact, the increasing adoption of these systems has triggered many debates around their security and privacy issues. While some of these discussions are legitimate, many of them are often misleading.
What is blockchain?
Blockchain is a distributed database that records network transactions and organizes them into a hierarchical chain of blocks. The integrity of each block in the chain is enforced by sophisticated cryptography algorithms.
The chain of blocks is created and maintained by a peer-to-peer network of software agents, called nodes. New blocks are committed to the global blockchain by these agents after the successful completion of the decentralized consensus procedure.
Blockchain has several advantages over other modern IT systems, which include:
- Decentralization allows all participating users to be part of the consensus, with the ability to audit information stored on the blockchain, without the need for a central authority.
- Transparency is ensured by granting universal access where every user has his own full copy of the distributed database. This quality of blockchains makes them one of the most trusted systems.
- Immutability guarantees that the recorded data will never be removed from the ledger and remain accessible, offering members of the network to view the full history of transactions.
How blockchain works
Blockchain, as a peer-to-peer network, makes use of clearly defined consensus for executing transactions between the nodes. In terms of cryptocurrency, for instance, the transactions will be related to the transfer of funds. In other applications, transactions can be related to their respective process data.
Making transactions on the blockchain involves the following steps:
- Block formation. A blockchain node broadcasts a transaction to the network. Transaction data is placed in the pool of unconfirmed transactions, where the candidate block is formed.
- Block validation. Participants of the blockchain validate the new blocks by solving a cryptographic puzzle. Blockchain rules determine the method of validation (proof of work, proof of stake, proof of authority, etc.). After the successful validation, the block is broadcasted to the network.
- Block acceptance. At least 51% of the nodes in the network must accept the new block for it to be valid and appended to the blockchain. Finally, the blockchain is extended, and the process repeats for new transactions.
In the Bitcoin network, for instance, the proof of work is used for block validation. Any node in the network can attempt to validate the block through a process called mining. Miners are awarded in cryptocurrency for every successful validation of a new block.
Blockchain security issues
Blockchains in spite of being one of the most secure systems in operation, can at times suffer from security vulnerabilities largely due to weaknesses in the design and implementation specifics of these systems. Some of the most common issues include “51% vulnerability”, private key security, exchange hacks, social engineering, double spending, and transaction privacy leakage.
Private key security
The private key serves as the identity and security credential. In the majority of blockchains today, public and private keys are generated using the elliptical curve digital signature algorithm (ECDSA). Thanks to this algorithm, the public key can be derived from the private key, but not vice-versa. While the public key can be shared and used as the address for sending transactions, the private key should always be kept safe, known only to the owner.
In spite of the blockchains being inherently secure structures, their security is directly related to the private key. The exposure of the private key will give an attacker access to one’s blockchain wallet, and to the funds kept in it.
Once lost, private keys cannot be recovered. If the private key is by any chance stolen by attackers, it will give them full access to the associated blockchain account and the opportunity to initiate transactions. Since the blockchain is not controlled by any centralized authority, it is difficult to track and recover the lost funds or information.
Exchange hacks
In recent years, as the pursuit of blockchain monetary benefits continues, the cryptocurrency trading business has become very popular. Due to the speculative nature of cryptocurrency value, the exchange is often considered the go-to option for quick investment return.
The main security issue with exchange services is that by centralizing the network they are diminishing the inherent security benefits of blockchains. For the exchange to work, the users are usually required to sign up for the services and register their wallets in third party databases. The IT infrastructure that serves as the backbone of the exchange services suffers from classical network security issues and is often prone to attacks.
When using exchange services to trade cryptocurrency, it is important to take additional security measures. The safest methods of storing cryptocurrency are either using hardware or paper wallets. These wallets are so-called cold storage wallets that have minimal exposure to malicious online attacks. We advise users to perform trading on decentralized exchanges (DEX) as they communicate directly with the cryptocurrency wallet.
Social engineering
In the context of blockchain security, social engineering entails the use of various deceptive techniques to manipulate individuals into uncovering and sharing their private keys, passwords, and other sensitive information that can be used for fraudulent purposes. The most common outcome of social engineering is identity theft, while it can also result in significant financial losses.
Phishing is one of the most popular forms of social engineering. In this scheme, the attacker impersonates a trustful resource and sends out messages, notifications, and emails requiring the victims to click on malicious links, fill out forms, and give out their sensitive information.
A typical phishing scenario involves the attacker using the domain name similar to the legit one. This way they defraud investors and point them to send funds to a false ICO payment address.
To avoid falling prey to a phishing scam, make sure to:
- Never share login credentials or private keys.
- Educate yourself and the people around you about common cases of social engineering.
- Never click on the email attachments, links, ads, or websites of unknown origin.
- Use anti-malware software and keep the software applications and operating systems updated.
- Use multi-factor authentication solutions whenever possible.
Transaction privacy leakage
In public blockchain networks, transactions are open and transparent. Their architecture makes every transaction traceable as well. The publicity of the data on the network keeps information synchronized and allows reaching consensus among distributed nodes.
At the same time, there are some privacy risk concerns associated with public data. Transactions could contain sensitive information about their issuers. In some blockchain applications, such as the internet of things or mobile crowdsourcing, transaction privacy leakage is a critical issue.
Indirect privacy leakage is possible through disclosure of the transaction content. Namely, the analysis of the transaction graph could uncover the correlation between transaction addresses. This correlation could further lead to revealing the user’s identity from additional data collected elsewhere.
The most popular solution to transaction leakage is the mixing service (cryptocurrency tumbler). The service allows several users to make transactions simultaneously with multiple inputs and outputs. In this way, the transaction inputs cannot be linked to their corresponding outputs.