Blockchain technology produces a structure of data with inherent security qualities. It's based on principles of cryptography, decentralization and consensus, which ensure trust in transactions. In most blockchains or distributed ledger technologies (DLT), the data is structured into blocks and each block contains a transaction or bundle of transactions. Each new block connects to all the blocks before it in a cryptographic chain in such a way that it's nearly impossible to tamper with. All transactions within the blocks are validated and agreed upon by a consensus mechanism, ensuring that each transaction is true and correct.
Blockchain technology enables decentralization through the participation of members across a distributed network. There is no single point of failure and a single user cannot change the record of transactions. However, blockchain technologies differ in some critical security aspects.
Blockchain networks can differ in who can participate and who has access to the data. Networks are typically labeled as either public or private, which describes who is allowed to participate, and permissioned or permissionless, which describes how participants gain access to the network.
Public and private blockchains
Public blockchain networks typically allow anyone to join and for participants to remain anonymous. A public blockchain uses internet-connected computers to validate transactions and achieve consensus. Bitcoin is probably the most well-known example of a public blockchain, and it achieves consensus through "bitcoin mining." Computers on the bitcoin network, or “miners,” try to solve a complex cryptographic problem to create proof of work and thereby validate the transaction. Outside of public keys, there are few identity and access controls in this type of network.
Private blockchains use identity to confirm membership and access privileges and typically only permit known organizations to join. Together, the organizations form a private, members-only "business network." A private blockchain in a permissioned network achieves consensus through a process called "selective endorsement," where known users verify the transactions. Only members with special access and permissions can maintain the transaction ledger. This network type requires more identity and access controls.
When building a blockchain application, it’s critical to assess which type of network will best suit your business goals. Private and permissioned networks can be tightly controlled and preferable for compliance and regulatory reasons. However, public and permissionless networks can achieve greater decentralization and distribution.
Public blockchains are public, and anyone can join them and validate transactions.
Private blockchains are restricted and usually limited to business networks. A single entity, or consortium, controls membership.
Permissionless blockchains have no restrictions on processors.
Permissioned blockchains are limited to a select set of users who are granted identities using certificates.
While blockchain technology produces a tamper-proof ledger of transactions, blockchain networks are not immune to cyberattacks and fraud. Those with ill intent can manipulate known vulnerabilities in blockchain infrastructure and have succeeded in various hacks and frauds over the years. Here are a few examples:
The Decentralized Autonomous Organization (DAO), a venture capital fund operating through a decentralized blockchain, inspired by Bitcoin, was robbed of more than USD 60 million worth of ether digital currency — about a third of its value — through code exploitation.
A theft of nearly USD 73 million worth of customers' bitcoins from one of the world's largest cryptocurrency exchanges, Hong-Kong-based Bitfinex, demonstrated that the currency is still a big risk. The likely cause was stolen private keys, which are personal digital signatures.
When Bithumb, one of the largest Ethereum and bitcoin cryptocurrency exchanges, was recently hacked, the hackers compromised 30,000 users' data and stole USD 870,000 worth of bitcoin. Even though it was an employee's computer that was hacked — not the core servers — this event raised questions about the overall security.
Hackers and fraudsters threaten blockchains in four primary ways: phishing, routing, Sybil and 51% attacks.
Phishing is a scamming attempt to attain a user's credentials. Fraudsters send wallet key owners emails designed to look as though they're coming from a legitimate source. The emails ask users for their credentials using fake hyperlinks. Having access to a user's credentials and other sensitive information can result in losses for the user and the blockchain network.
Blockchains rely on real-time, large data transfers. Hackers can intercept data as it's transferring to internet service providers. In a routing attack, blockchain participants typically can't see the threat, so everything looks normal. However, behind the scenes, fraudsters have extracted confidential data or currencies.
In a Sybil attack, hackers create and use many false network identities to flood the network and crash the system. Sybil refers to a famous book character diagnosed with a multiple identity disorder.
Mining requires a vast amount of computing power, especially for large-scale public blockchains. But if a miner, or a group of miners, could rally enough resources, they could attain more than 50% of a blockchain network's mining power. Having more than 50% of the power means having control over the ledger and the ability to manipulate it.
Note: Private blockchains are not vulnerable to 51% attacks.
In today's digital world it is essential to take steps to ensure the security of both your blockchain design and environment. X-Force Red blockchain testing services can help you do just that.