Dynamic Loss Distribution Model for Cyber Risk and Contagious Failure of Smart Contracts

Description

Background

Blockchain-enabled technologies, including smart contract technology, are estimated to produce $176 billion of business value-add by 2025. Despite the many advantages of smart contract usage, liabilities and value losses can result from coding errors, malicious attacks, and suboptimal contract terms. Currently these uncertainties hinder the pace of smart contract adoption since no financial instruments exist to manage associated risks. Development of insurance policies for smart contracts can therefore open new growth opportunities. Because historical data on loss distribution is lacking for smart contracts, practical structural models may provide the framework needed to quantify these financial risks. 

Invention Description

Researchers at Arizona State University have developed a novel simulator to quantify loss distribution within a network of smart contracts and their users, specifically in the event of a cyber attack or contagious failure. Network topology is expressed as a tree random graph where each node is a center of a star graph whose leaves represent the users of a contract. With specified contagion probabilities between users and contracts as well as between contracts themselves, a percolation model gives aggregate losses due to breach or failure.

Potential Applications

•       Smart contract insurance

•       Network risk assessment

Benefits and Advantages

•       To the best of the inventors’ knowledge, this work is the first to model pricing risk of smart contracts

•       Simulation incorporates dynamical nature of asset values

•       Analytical and numerical results hold for arbitrarily large random star-tree graphs 

Case ID:
M19-187P
Published:
12-10-2019
Last Updated:
05-07-2020

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