Ruadhan O is the creator of Season Coins.
Web3 has emerged as a major paradigm shift in the way business is conducted online. By integrating blockchain technology with the internet, it is fundamentally changing the way companies interact with their customers.
Emerging technology such as DeFi enables companies to access and offer financial services directly to users without the need for a financial institution to act as an intermediary. And tokenization can enable companies to issue digital assets that can be traded on online marketplaces, used to represent company stock or as a means of accessing products and services.
However, Web3 carries unique risks that can jeopardize a company’s success unless handled carefully.
Many companies have suffered in recent years high-profile hacks that have led to losses of millions of dollars.
Clear rules for using Web3 technologies have yet to be developed, and some worry that regulators such as the SEC may unexpectedly begin enforcing action against companies that believe they are complying with the law.
Platforms and projects that appear legitimate can turn out to be fraudulent, leading to losses or reputational damage for honest companies that work with them. At the same time, the public nature of blockchain transactions has new implications for user privacy and the need to protect sensitive information.
As an example of a potential problem, security vulnerabilities in smart contracts can be detected and exploited by malicious actors. I have had to anticipate and mitigate these risks while implementing my own smart contracts.
While it’s not possible to completely eliminate all risks, there are steps companies getting started with Web3 can take to minimize the potential for potentially catastrophic problems later on.
Mitigate security risks and deal with regulatory uncertainty in Web3 adoption
Security vulnerabilities are one of the biggest threats to businesses using Web3. I think the best way for companies to minimize the risk of inadvertently deploying insecure contracts is to employ experienced developers with a proven track record of secure smart contract development and to use third-party security firms for code audits and penetration testing.
Keeping abreast of emerging security threats is also advisable to avoid contracts with vulnerabilities to known exploits. Incorporating a mechanism to deactivate contracts and replace them with an upgraded version provides a way to remove vulnerabilities that are discovered after the contracts are deployed.
In addition to security vulnerabilities, regulatory uncertainty is also a major concern for companies considering adopting Web3 technologies.
To avoid becoming the subject of future enforcement action, companies can consult legal experts with experience in blockchain and cryptocurrency regulation.
For example, the SEC recently declared companies such as CoinBase, creak And Twin to violate securities laws, stipulating that certain staking and lending programs are offers of unregistered securities. The outcomes of these cases can provide more clarity in the field of regulation.
Balancing transparency and privacy: best practices
One of the most important features of a blockchain is its transparency, which results in a high level of auditability and removes the need for trust. However, this transparency can lead to the inadvertent disclosure of sensitive company information or user data.
Companies must distinguish between non-sensitive information that can be stored on a public blockchain and confidential user data that must be kept off-chain on the company’s internal servers.
Privacy-preserving technologies such as zero-knowledge proofs and confidential transactions may in some cases be used to allow users to transact without disclosing all of the information involved to the public.
However, I think using mixers like Tornado Cash should be avoided as they are considered money laundering tools and these companies are sanctioned by the Treasury Department’s Office of Foreign Assets Control, making it illegal for US residents to use.
As can be seen, the growing adoption of Web3 technologies presents both opportunities and challenges for businesses. New ways of interacting with customers and new business models emerge as technology evolves, making it necessary for companies to innovate to stay competitive, as well as making it necessary to address security and regulatory risks.
As the Web3 ecosystem matures, I believe companies that successfully manage these risks will be better positioned to take advantage of the new opportunities offered by decentralized technologies.