Risks of Using Blockchain Platforms by Startups

May 14, 2019 Business, Startups

Despite all benefits, Blockchain has its risks and you need to develop a detailed implementation strategy in advance if you want to leverage it. Start-up owners have an inborn desire to stay ahead of the game, to adopt the best and latest technologies, but using Blockchain without considering the risks can hurt your business.

blockchain risks

Blockchain is one of the most disruptive technologies in the financial sector, but its influence on the business world isn’t negligible either. In fact, global spending on blockchain solutions reached $2.1 billion in 2018 and ICO investments increased 16 times, making Blockchain more than a simple trend.

The technology offers indisputable benefits for businesses across all fields: it increases transaction security, speeds up financial processes by eliminating reliance on banks and third-party institutions, and allows for transparency in the client-supplier relationship. World-class companies like Walmart, UPS, and British Airways are experimenting with Blockchain to manage data, streamline international shipping, and solve customer disputes.

At the same time, startups are experimenting with Blockchain too and, thanks to this technology, they can overcome many of the challenges of owning a small business. If you own a startup, Blockchain can help you raise capital globally, make low-cost agreements thanks to smart contracts, streamline employee verification, and much more.

1. Unclear regulatory environment

The first and most important risk you’ll need to consider before using a Blockchain platform is the regulatory environment in your country.

Despite its widespread adoption and sky-rocketing growth, Blockchain is still a new technology, which means that in many countries its regulation is a grey area. If that applies to you, then you might want to postpone implementation by a few years. Otherwise, you could face legal problems, fines, and even risk being out of business.

At the positive end, there’s the European Union, which is taking great strides in Blockchain implementation. Governments and financial institutions alike are developing legislation to regulate the emerging Blockchain industry and facilitate Blockchain capital and investment. However, the EU is made up of more member states and the legislation isn’t adopted at the same rate. If Switzerland, Sweden, and the UK are leading the way in Blockchain innovation, other countries are still lacking a clear regulatory environment:

  • China still relies on traditional banking systems and is trying to limit the activity of international crypto businesses.
  • Vietnam denied crypto payments in 2017 and forbid financial institutions to engage in Blockchain-related activities. Last year, they also suspended the importation of crypto-mining gadgets.
  • Morocco has harsh fines to any person or business engaging in cryptocurrency transactions.

In the United States, the status of Blockchain is still unclear, because government agencies follow the “regulation first, business later” approach. Cryptocurrency classifies as an asset under the existing regulation, which makes many startups want to consider Europe as a better location.

2. High implementation and maintenance costs

After you’ve checked that your country of operations has a Blockchain-friendly regulatory environment, it’s time to consider the implementation and maintenance.

Implementation costs depend on several factors:

  • Country of operations
  • The purpose of development
  • The size of your business
  • Your industry
  • Marketing

When you draw the line, these costs can reach pretty high levels, especially considering that you also need to cover legacy system integration. Other steps you’ll need to take include:

  • Integrate a crypto payment gateway into your app or website
  • Develop smart contracts
  • Integrate smart devices with IoT
  • Integrate Blockchain with your existing enterprise software

All of these and much more require putting together a skilled development team, and staffing costs can increase as well. Not every market has trained workforce in the Blockchain fields, so you’ll need to consider outsourcing or training existing staff.

After implementation, you should also consider maintenance costs, which run a bit high. However, as technology evolves, distributed ledgers could become cheaper to maintain and they will be more affordable for small start-ups.

3. The platform is not integrated with existing systems

If you own a startup, you probably already have installed some form of enterprise software or are considering doing so. Software is an essential investment that can help you boost productivity and workplace collaboration, streamline customer support and make sure your company runs like a well-oiled machine.

Before you include Blockchain in your business operations, you need to make sure your existing systems accept this implementation. Otherwise, you’ll end up with the same problems you were trying to avoid and your productivity will be affected.

Talk to your existing supplier to find out if they can guarantee seamless Blockchain integration. If they can’t, you may have to switch suppliers. Follow these tips to avoid implementation challenges:

  • Deploy implementation in stages
  • Start with a non-critical activity to avoid a crisis
  • Use tested, open source code
  • Solve technical issues first and then develop smart contracts
  • Make sure the implementation is closely monitored to catch potential errors before they become liabilities.

4. Vendor risks

The Blockchain market is booming at the moment. There are more vendors than ever before and, no matter in what industry you activate, you’ll find a supplier who will promise you that their Blockchain solutions will take your business to new heights.

Take a moment to check the reliability of their claims. Nowadays, it’s easy to launch an ICO and gain investor attention, but not all Blockchain startups have what it takes to become your long-term business partner. Putting your trust in the wrong blockchain vendor can become a massive risk and it wouldn’t be an exaggeration to say that it can even lead to the demise of your business.

Let’s take the example of transactions. In the traditional model, whatever issue may occur is handled by the central intermediary. With Blockchain, this intermediary doesn’t exist, so take value transfer risks into account.

Follow this checklist when choosing your Blockchain platform:

  • Make sure the vendor doesn’t have weak security systems that could expose your credentials to unauthorized parties. If you develop smart contracts, the smallest security breach can be catastrophic.
  • Always choose permissioned blockchains. They have an admin who evaluates parties who want to participate in the network.
  • Use all online tools at your disposal to verify the vendor’s reputation. Look for articles about them in specialized publications, look up the founders, check employee testimonials on Glassdoor, and read client testimonials.
  • Carefully read the company’s whitepaper to see if there are any signs of fraudulent activity. It’s surprisingly easy to spot red flags in an ICO, the professional writers at Trust My Paper explain. Apart from spelling and grammar mistakes, which are never a sign of professionalism, look out for papers that are full of “fluff”. If the paper lacks substance and actual arguments, but abounds in buzzwords like DISRUPTIVE and MAKE THE WORLD A BETTER PLACE, that’s not a good sign. Ideally, the whitepaper should be short and to the point – 9 pages are more than enough to describe the product and mission statement. A reliable company doesn’t have to go on and on about the general benefits of Blockchain; they know their product is the main focus. You might also want to run it through plagiarism software. If more than 1% is copied, then that company doesn’t have a strong offering and is most likely a fraud.
  • Make sure their code is peer-reviewed.

5. Lack of testing and sustainability

Blockchain is a new technology, and its long-term impact on business operations is still unknown territory. Using a Blockchain platform may sound like a good idea now, but what about five or ten years from now? Will the same benefits still apply? Will you be able to scale up or down if your business has different needs? Unfortunately, Blockchain applications can be experimental, and experiments don’t go well with startups. If you do want to incorporate Blockchain, then you have to learn how to balance risks and benefits.

At the same time, real-world testing of blockchain can also become a major risk. Many Blockchain platforms sound brilliant in theory but weren’t tested in practice. To mitigate risks, don’t be an early adopter. Wait for the platform to build a considerable user base and wait for some reviews to come in before you try it yourself. If other enterprises report fantastic results and few errors, then the platform has the green light, but if no one knows about the real-life benefits of their products, then it’s better to stick with traditional platforms.

The bottom line

When implemented correctly, Blockchain architecture can propel your startup, but it also comes with certain risks that may or may not depend on the vendor. Before jumping on the bandwagon and using a Blockchain platform just because competitors are doing it, take the time to analyze its long-term sustainability and set up a stage-by-stage implementation plan. At the end of the day, the Blockchain platform has to align with your financial goals and integrate seamlessly with existing applications.