Open Source Operational Risk and Public Blockchains

Presented at New Context Conference, sponsored by Digital Garage, in Tokyo on July 26, 2017.

Transcript

1. Open-Source Operational Risk
   and Public Blockchains
   Angela Walch
   Associate Professor
   St. Mary’s University School of Law
   Research Fellow
   UCL Centre for Blockchain Technologies
   New Context Conference, Tokyo July 26, 2017
   1
   UCL CENTRE FOR
   BLOCKCHAIN TECHNOLOGIES
   

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2. Main Questions
   • How do common practices from
   “grassroots” open source software
   generate operational risks for public
   blockchains?
   • Are these risks ok for critical systems?
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3. How We’ll Proceed
   • Look at how operational risks are handled in
   existing critical systems, using financial market
   infrastructures as an example.
   • Discuss how common practices from
   grassroots open source software generate
   operational risks for public blockchains.
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4. What are
   Financial Market Infrastructures?
   • Financial market infrastructures are “multilateral systems
   among participating financial institutions…used for the
   purposes of clearing, settling, or recording payments,
   securities, derivatives, or other financial transactions.”
   (Federal Reserve).
   • They include “payment systems, central securities
   depositories, securities settlement systems, central
   counterparties, and trade repositories.” (Federal Reserve).
   • These systems allow us to keep track of who owns (and
   owes) what.
   • FMIs ongoing functioning is critical to financial stability.
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5. What is Operational Risk?
   The risk that deficiencies in information systems or
   internal processes, human errors, management failures,
   or disruptions from external events will result in the
   reduction, deterioration, or break-down of services
   provided by the [financial market
   infrastructure]…includ[ing] physical threats, such as
   natural disasters and terrorist attacks, and information
   security threats, such as cyberattacks.
   Further, deficiencies in information systems or internal
   processes include errors or delays in processing, system
   outages, insufficient capacity, fraud, data loss, and
   leakage. (Federal Reserve)
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6. Principles for Financial Market
   Infrastructures
   Principle 17: Operational risk:
   An FMI should identify the plausible sources of operational
   risk, both internal and external, and mitigate their impact
   through the use of appropriate systems, policies, procedures,
   and controls.
   Systems should be designed to have a high degree of security
   and operational reliability and should have adequate, scalable
   capacity.
   Business continuity management should aim for timely
   recovery of operations and fulfillment of the FMI’s
   obligations, including in the event of a wide-scale or major
   disruption. (PFMI 2012).
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7. Principles for Financial Market
   Infrastructures (cont.)
   Principle 2: Governance:
   An FMI should have governance arrangements
   that are clear and transparent, promote the
   safety and efficiency of the FMI, and support the
   stability of the broader financial system, other
   relevant public interest considerations, and the
   objectives of relevant stakeholders. (PFMI 2012).
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8. Principles for Financial Market
   Infrastructures (cont.)
   Principle 3: Framework for the comprehensive
   management of risks:
   An FMI should have a sound risk-management
   framework for comprehensively managing legal,
   credit, liquidity, operational, and other risks.
   (PFMI 2012).
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9. What is
   Grassroots Open Source Software?
   • Emerges from software developer community.
   • Contrasted with ‘corporate’ or ‘sponsored’
   open source software.
   • Source code is available to all.
   • Anyone can fork it to improve or modify it.
   • Examples are Linux, Open SSL, Bitcoin.
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10. Grassroots OSS Practices
    Create Operational Risks
    for Public Blockchains
    Governance
    Funding
    Forking
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11. Decentralized, Undefined Governance
    • No official responsibility/accountability to
    keep software operational.
    • No one is the official “decider.”
    • Unacknowledged Centralization of Power
    – Unaccountable
    – Unchecked
    • Lead to  Paralysis/Delay in fixing code.
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12. Problematic Funding Model
    • Grassroots OSS development generally
    uncompensated.
    • Inadequate care of critical OSS projects?
    – Heartbleed / Core Infrastructure Initiative / Mozilla’s SOS
    • Bitcoin had luxury of low-stakes youth.
    • No one is low-stakes now.
    • Experiments in funding:
    – Pre-sales, Tokens, ICOs.
    – Private Companies / Sponsorships
    • Conflicts of Interest? How stable is funding source
    long-term? Are consumers protected?
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13. Forks
    • Possible Outcomes:
    – Peaceful coexistence of old and new
    – Old die
    – New dies
    – Contentious coexistence of old and new
    • Consequences significant for Public Blockchains
    – Embed and transfer actual value
    – Serve as authoritative record of events
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14. Real World Examples
    • March 2013 Hard Fork
    – Different versions incompatible.
    – 2 ledgers.
    – Human Coordination to fix (requiring ALTRUISM)
    • Bitcoin Block Size Debate
    – Political Question  Not just technical.
    – Paralysis because consequences so extreme.
    – SegWit fix?
    • Ethereum’s July 2016 Hard Fork
    – Ethereum & Ethereum Classic
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15. Lessons Learned
    • New software releases  fractured networks.
    • Fixing forks may need human coordination.
    • Core devs/Miners/Exchanges wield a lot of
    power/influence.
    • Risk of forks  Paralysis.
    • Upper-level apps can impact underlying blockchain.
    • Humans aren’t perfect. Neither is code.
    • Competing Blockchains are possible outcome of fork.
    – Which is legitimate?
    – If embed critical records, which is “correct”?
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16. Chained Together
    • Magnified software risks for structures atop
    public blockchains.
    • Community commits to staying together for
    system to have value – 1 authoritative record.
    • Each potential hard fork like binding secession
    referendum.
    – If don’t go with majority  you’ve seceded.
    – Build your own!
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17. Reflections
    • Undefined governance, problematic funding, and
    forking chance create operational risks for public
    blockchains.
    • As practices are tweaked, risks change.
    • Very different from how we operate current
    critical infrastructures, such as FMI’s.
    – Clear governance.
    – Comprehensive risk management.
    – Identifying and mitigating operational risks.
    • Broader Implications -- think about use of
    grassroots OSS practices in other critical systems?
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18. Angela Walch
    angelawalch.com
    Twitter: @angela_walch
    awalch@stmarytx.edu
    UCL CENTRE FOR
    BLOCKCHAIN TECHNOLOGIES
    

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