Underlying Blockchain Risk
Mitigate underlying blockchain risk with this analysis.
Key Risks
Technical Failure
Blockchain is a technology still in its infancy. The codebases of most blockchains are not older than 3 years and thus, don’t have a long track record. With blockchain protocols that haven’t existed for a long time, there’s a heightened risk of technical failures such as outages, hacks, and other technical failures.
51% Attacks
A 51% attack is a hostile takeover of a blockchain network. This happens through acquiring a majority stake in the network - either by amassing enough computing power (proof of work) or underlying tokens (proof of stake) of the network. This majority stake in the network is then being used to manipulate transactions, e.g. doing a double-spend attack. The motive for a 51% attack can be money (hacker) or a non-monetary motive (e.g. state actor undermining the network for other reasons).
Recent examples: Bitcoin SV, Ethereum Classic
Hacks
Hacks are a result of buggy code which is then exploited by a hacker leading to blockchain outages, data loss, or stolen funds.
Recent examples: Solana, Axie Infinity
Outages
Outages can happen when a blockchain’s infrastructure is not robust and decentralized enough. Most outages happen when all nodes are being run by a single entity or when there’s a bug in the codebase. Outages lead to no access to the funds that users have stored on a blockchain.
Recent examples: Solana, Luna
Risk Analysis
Review of blockchain’s open-source codebase and audits
Review of developer team behind the protocol
Analysis of hash power / token distribution
Look at the project’s security track record
In order to assess the underlying blockchain risk, we do a quantitive and qualitative analysis of the following items:
Network Distribution
2.5
Track Record
2
Code + System Review
1
Project Team
0.5
Network Distribution
For proof of work consensus blockchains, we look at the network hash rate distribution by country and hashpool following the methodology described in this paper:
For proof of stake systems, we adopt the same methodology by replacing the hash power of a node with the share of network tokens staked.
Based on this methodology, we give out 0-2.5 points.
Track Record
The longer a blockchain network exists, the more robust we can consider it as Lindy effects come into play. We calculate a blockchain’s track record in years starting from the last time it had an exploit/network issue and then give out 0.5 points for every year a blockchain has existed without any issues.
Code + System Review
In addition, we do an in-house qualitative review of a blockchain protocol’s code and system design for 1 point.
Project Team
We review the team and investors behind a project based on their track record, CVs, and technical skill.
Based on our qualitative assessment we give up to 0.5 points.
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