How Businesses Can Deal With The Risks Of Web3

Ruadhan O is the creator of Seasonal Tokens.

Web3 has emerged as a major paradigm shift in how business is conducted online. By integrating blockchain technology with the web, it’s fundamentally changing how companies interact with their customers.

Emerging technology like DeFi allows businesses to access and provide financial services to users directly without needing a financial institution to act as an intermediary. And tokenization can allow businesses to issue digital assets that can be traded in online marketplaces, used to represent company shares or as a means to access products and services.

However, Web3 comes along with unique risks that can jeopardize the success of a business unless they’re handled carefully.

Navigating The Risks Of Web3: Challenges And Considerations

Many companies in the past few years have suffered high-profile hacks that have led to losses of millions of dollars.

Clear regulations for the use of Web3 technologies have yet to be developed, and some worry that regulatory agencies such as the SEC may unexpectedly begin enforcing actions against companies that believe themselves to be in compliance 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 partner 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 concern, security vulnerabilities in smart contracts can be detected and exploited by malicious actors. I’ve had to anticipate and mitigate these risks during the deployment of my own smart contracts.

While it’s not possible to completely eliminate all risk, there are steps that businesses getting started with Web3 can take to minimize the likelihood of potentially disastrous problems occurring later on.

Mitigating Security Risks And Navigating Regulatory Uncertainty In Web3 Adoption

Security vulnerabilities pose one of the biggest threats to companies using Web3. I think the best way for businesses to minimize the risk of unintentionally deploying insecure contracts is by hiring experienced developers with a proven track record in secure smart contract development and engaging external security firms for code audits and penetration testing.

Staying informed about emerging security threats is also advisable to avoid deploying contracts with vulnerabilities to known exploits. Building in a mechanism that allows contracts to be deactivated and replaced by an upgraded version provides a way to remove vulnerabilities that are discovered after the contracts have been deployed.

Along with security vulnerabilities, regulatory uncertainty is also a major concern for businesses considering the adoption of Web3 technologies.

To avoid becoming the subject of future enforcement actions, companies can consult legal experts with experience in blockchain and cryptocurrency regulation and can also benefit by engaging in industry discussions to stay informed and contribute to shaping future regulation.

For example, The SEC has recently declared companies such as CoinBase, Kraken and Gemini to be in violation of securities laws, determining that certain staking and lending programs constitute offerings of unregistered securities. The outcomes of these cases may provide more regulatory clarity.

Balancing Transparency And Privacy: Best Practices

One of the core features of a blockchain is its transparency, which results in a high degree of auditability and eliminates the need for trust. However, this transparency could lead to the unintentional exposure of sensitive business information or user data.

Businesses should distinguish between non-sensitive information that can be stored on a public blockchain and confidential user data that needs to be kept off-chain on the company’s internal servers.

Privacy-preserving technologies such as zero-knowledge proofs and confidential transactions can be used in some cases to allow users to make transactions without revealing all of the information involved to the public.

I think the use of mixers such as Tornado Cash, however, should be avoided, because they’re regarded as money-laundering tools, and these companies are being sanctioned by the Treasury Department’s Office of Foreign Assets Control, making it illegal for U.S. 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 are emerging as the technology develops, making it necessary for companies to innovate to stay competitive, and also making it necessary to deal with the security and regulatory risks involved.

As the Web3 ecosystem continues to mature, I think businesses that successfully handle these risks will be better positioned to benefit from the new possibilities that decentralized technologies offer.

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