While blockchain was initially conceived only as a way of providing a secure alternative for payments and transactions between parties via cryptocurrency, the technology has since vastly expanded its capabilities and is now actively being adopted to fill security and transparency gaps in industries like healthcare, real estate and supply chain. And all of this is possible thanks to the technology’s decentralized nature and blockchain data protection mechanisms.
At its core, blockchain is a decentralized data recording system that is extremely difficult (practically impossible) to alter, attack, or cheat. It’s a digital ledger of transactions that is replicated and shared among members of an entire computer network. A blockchain is formed by connecting different data blocks to one another. Every block stores information about different transactions. In other words, new transactions taking place on the blockchain are organized into blocks that are sequentially added to the ever-growing ledger. Each new block is cryptographically linked to the last block in the chain. This cryptographic link ensures that changing the transaction history recorded on the blockchain is infeasible.
Furthermore, sharing the ledger’s transaction history among participants means that every member of the peer-to-peer network can confirm the legitimacy of every recorded transaction and prevent fraud.
The original consensus model that blockchain used to stimulate proper transaction validation is Proof of Work and requires blockchain miners to solve complex cryptographic mathematical equations using computational power. However, this model is extremely energy-consuming, expensive, and threatening to the environment. As a result, Proof of Stake emerged, an alternative where members can validate blocks by staking digital coins.
Immutability, transparency and other benefits
Blockchain may still be in its early stages of development, but its advantages are already clear. Data protection is at the highest level as every record is individually encrypted and immutable, as once validated, blocks become irreversible and unchangeable. All data stored on a blockchain is also fully transparent due to the shared ledger concept in a distributed network. The use of smart contracts also makes blockchain programmable and reliable.
Despite the strong security foundation of blockchain, there are several security risks that must be addressed as the technology develops. One of the most common threats in the chain’s early phase is the 51% attack, where a single organization, individual, or group of miners accumulate the majority of the hash rate and gain control over the system. Fortunately, the risk of such an attack happening is very low when it comes to large networks with sufficient levels of decentralization.
Phishing attacks are another frequently seen scenario, where hackers steal credentials and take over control. Another concern is the possibility of routing attacks. The technology is dependent on real-time transfers of huge amounts of data. Hackers can take advantage of an account’s anonymity and intervene with data during the transmission process.
Security risks are not the only challenge blockchain is facing, as some of its core properties may have some undesirable effects in certain scenarios. More specifically, the technology’s public, transparent, and permissionless nature is often at odds with various privacy requirements related to both privacy protection laws and the need to safeguard sensitive business data such as trade secrets and know-how.
Overcoming privacy challenges in blockchain data protection
Although the public nature of blockchain offers unique opportunities, there are situations, where the need for more privacy calls for a different solution – permissioned networks. In a public blockchain, anyone has the right to join the network and gain access to data. On the other hand, in private blockchains, only entities who have permission can join the network. Such blockchains are not entirely trustless and are predominantly used in smaller networks with only a few members. However, smaller networks are highly exposed to malicious attacks and are best suited for enterprise-grade solutions.
Developers have already started addressing some of the setbacks of completely private blockchains. For instance, zero-knowledge proofs are mathematical instruments that ensure that a private protocol can confirm the validity of its data to a public ledger without revealing the data. On the other hand, the creation of hybrid networks allows the technology to experience the best of both worlds. Hybrid networks aim to provide control and freedom simultaneously. They are not open to the public but incorporate features like transparency, integrity, and security, typical for the public network.
As more and more organizations embrace blockchain technology, regulatory compliance becomes crucial. For businesses looking to incorporate blockchain into their models, it’s vital to have a sound understanding of existing regulations. It’s also essential to ensure business processes are structured and organized in a way that does not break or come in conflict with applicable laws.
In a nutshell
Blockchain’s data protection and security remain a hot topic that inspires interest from developers, businesses, end-users and the broader blockchain community. The founding gems of blockchain or its public and transparent nature could turn out to be a threat in disguise in the long term, if not properly adapted to the real world. Efforts are already being made to overcome privacy challenges and unavoidable improvements lie ahead.