Hong Kong is looking into building a trade-financing system using blockchain technology, a senior official said. Blockchain, the decentralized encryption technology behind cryptocurrencies, could provide “great benefits” to trade finance in countries participating in China’s Belt and Road initiative, said James Henry Lau, Hong Kong’s Secretary for Financial Services and the Treasury, at a forum Friday.
Blockchain works by automatically recording transactions in inerasable digital ledgers distributed across a network in which all data is visible to every member of the network and transactions don’t require a central authority’s approval. This technology could cut the huge input of human resources and time that trade financing traditionally requires, reduce chances of fraud and lower companies’ investment costs through more efficient settlements, according to Lau.
Trade along the Belt and Road is mostly conducted by small and medium-sized enterprises, so blockchain’s distributed ledger technology could help by cutting out the need for a central organization and middlemen.
In March, Hong Kong completed a proof-of-concept project that demonstrated how blockchain can be used to digitize contracts and cut the risk of fraud and duplicate transactions.
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Open blockchains (i.e. anyone can contribute to creating the consensus ledger) can have a “51% attack” vulnerability – if someone controls 51% of all mining power for a chain, they can modify the chain to modify previous entries.
But it appears to me that any N blockchains that use the same basic algorithm (same mining hardware, so miners can switch between blockchains easily) increase the overall vulnerability for at least the smaller N-1 chains by a factor of N/2. And this is by no means an uncommon thing – lots of ICOs just grab Bitcoin’s mining algorithm and customize it to their chain.
Suppose you’ve got 100 chains that all use the same proof of work mining algorithm as BitCoin and suppose the mining effort is spread evenly over those 100 – i.e. each gets 1% of all mining power. Then any miner that has a bit over 1% of the total mining power can jump into any blockchain and use the 51% attack against it. By trading ill-gotten gains into other blockchains, they can do it fairly anonymously. When users of that blockchain realize they’re getting cheated, they’ll cease to trust it, and shift to one of the other 99, which are just about as vulnerable – so the villain could hop from chain to chain, ruining the reputation of each and making a big enough profit to keep increasing their mining power.
Something to keep in mind when reading about a coin ICO – if it uses the same mining algorithm as BitCoin, it probably won’t have nearly as many miners, so the chances are much higher that it will be vulnerable to attack by less-than-scrupulous Bitcoin miners looking for a quicker profit.