What Is Blockchain?

Blockchain is like a secure, unchangeable and globally accessible database that helps track assets and document transactions in a business network. These assets can be physical things like a house, car, money, or even a piece of art, or they can be intangible, like patents, copyrights, special code, or intellectual property. Imagine it as a digital record book that anyone in a network can access and use. This technology makes it possible to record and trade almost anything valuable, which reduces risk and makes things more efficient for everyone involved.

A good example of this is when Tim Berners-Lee, the creator of the World Wide Web, auctioned off the original source code of the web as a piece of memorabilia using blockchain. Now that's pretty cool to own, right?

The big question here is: Why do we need blockchain technology when we can manage all of these tasks with our current information storage and retrieval systems? First, we must remind ourselves of the fact that information is the lifeblood of any business. It needs to be protected from tampering, kept confidential, and readily available when requested.

Imagine a common scenario where a hacker or even an insider gains access to servers containing valuable information with the intent to modify it. Traditional storage systems often rely on centralized servers or databases, which makes them vulnerable to single points of failure and potential attacks. In contrast, blockchain is a decentralized ledger that distributes data across a network of nodes (computers). This decentralization enhances system resilience and reduces the risk of data loss due to hardware failures or cyberattacks.

Let's take a closer look at what makes information secure and why blockchain is a valuable candidate for protecting it. The CIA Triad (which stands for Confidentiality, Integrity, and Availability) in cybersecurity is a well-known concept to begin with:

1. Confidentiality: Private blockchain ensures that data is accessible and modifiable only to authorized network users, safeguarding sensitive information from unauthorized access.
2. Integrity: The immutable nature of blockchain guarantees the accuracy and reliability of data, ensuring that once information is recorded on a (public) ledged, it remains unaltered.
3. Availability: Blockchain enhances the availability of data with providing a decentralized system with thousands of computers storing its ledger spreading across the world where authorized users can readily access important information like ownership, payments, or smart contract (we will elaborate on smart contract later on)

An example of a front-running company leveraging blockchain technology to capitalize on these benefits is IBM. IBM has been actively involved in the development and implementation of blockchain technology to enhance security across various industries, such as Identity Management Systems and Supply Chain Solutions.

Blockchain is exceptionally well-suited for delivering this information because it offers immediate, shareable, and entirely transparent data recorded on an immutable ledger, which can only be accessed by network users with the appropriate permissions. A blockchain network can effectively track various aspects, including orders, payments, accounts, and production processes. Furthermore, because all network members share a unified view of the truth, every facet of a transaction, from its inception to completion, is visible to all parties involved. This opens up new opportunities and possibilities in the world of business.

Smart Contracts Explained

Now, let's explore smart contracts. These digital contracts are essentially programs that execute when certain conditions are met and are stored on a blockchain. They are often used to automate the enforcement of an agreement, ensuring that all parties involved can be certain of the outcome immediately, without the need for an intermediary or delays. They can also automate workflows by triggering the next step automatically when specific conditions are met.

Source: https://www.foley.com/en/insights/publications/2021/09/smart-supply-chains-using-smart-contracts

Consider a crop insurance smart contract designed for farmers. This contract uses weather data to automate claims and payouts. Here's how it works:

1. Smart Contract Creation: A farmer buys a policy with conditions clearly defined in a smart contract stored on the blockchain. For instance, the contract could state that if rainfall drops below a certain level during the growing season, the farmer is automatically entitled to a payout.
2. Inbound Oracle: When the condition (low rainfall) is met, a weather data provider, acting as an inbound oracle, feeds this information into the blockchain. This data triggers the smart contract's execution.
3. Smart Contract Execution: The smart contract, upon receiving the verified data from the oracle, automatically validates that the conditions for a claim are met without the need for manual processing.
4. Outbound Oracle and Action: Once the contract executes, an outbound oracle can notify the farmer and the insurance company of the claim's approval and trigger the payment process. The smart contract initiates a transaction, releasing funds from the insurer's account to the farmer's account.

This system eliminates the need for farmers to file claims manually and for insurance companies to process them, greatly accelerating the payout process and ensuring that farmers receive funds when they are needed most. Furthermore, because smart contracts are immutable, unethical insurance companies are much less likely to deny farmers compensation.

The Security Challenge

Just like any newly developed technology, smart contracts show promise but also raise several security concerns. Developers eager to use this technology may not always have sufficient knowledge of essential security measures. Consequently, they might inadvertently introduce vulnerabilities into their code, which could be exploited by malicious entities.

One of the main security problems is smart contract exploits. This can happen in several ways: from developers relying on compromised third-party libraries to failure to store private keys or even failure to generate keys properly to downright simple human-made errors.

The DAO Hack

To illustrate the gravity of these security concerns, we need to look no further than the infamous DAO hack of 2016. The DAO (Decentralized Autonomous Organization) was a crowdfunding platform built on the Ethereum blockchain, designed to allow users to vote on and fund projects. However, a vulnerability in the DAO's code allowed an attacker to exploit a re-entrancy bug, draining approximately $50 million worth of Ether from the organization. This incident not only highlighted the need for thorough security audits but also led to a contentious hard fork in the Ethereum network to reverse the theft.

A more recent example of the critical nature of blockchain security is the Nomad Bridge Heist of 2022. Nomad Bridge, a protocol enabling asset transfers across different blockchains, was exploited due to a security flaw in its code. Hackers managed to manipulate message verification methods, allowing unauthorized withdrawals. This resulted in the loss of nearly $190 million in various cryptocurrencies. This breach underscored the importance of stringent security measures and the necessity of comprehensive audits in the blockchain sector.

These are just two examples among many. Numerous smart contract hacks and vulnerabilities have been identified over the years, resulting in substantial financial losses and undermining trust in blockchain technology.

The Importance of Regular Audits

Regular smart contract audits are vital for mitigating security vulnerabilities. These audits involve comprehensive reviews of the smart contract's code by security experts to identify weaknesses and potential exploits. Here's why they are essential:

1. Risk Mitigation: Audits help identify security flaws before they can be exploited. This proactive approach reduces the likelihood of breaches and safeguards the assets and data within the contract.
2. Compliance and Trust: Audited contracts are more likely to gain regulatory approval and the trust of users, investors, and partners. They demonstrate a commitment to security and responsible development.
3. Cost Savings: Detecting and addressing vulnerabilities early in the development process is significantly cheaper than dealing with the aftermath of a successful attack, which can result in substantial financial losses and reputational damage.

Nullify Your Security Risks

When your business is engaged in critical and high-stakes operations, it is essential to have a cybersecurity partner ready for unexpected events. Nullifyer specializes in smart contract audits and offers a range of services aimed at identifying and eliminating vulnerabilities in your blockchain-based systems.

Our team of experts has a deep understanding of blockchain technology, from code-level intricacies to stakeholder concerns. We perform thorough code reviews, identify potential vulnerabilities, and provide practical recommendations to strengthen your operations.

Conclusion

In the dynamic world of blockchain, securing smart contracts is crucial. Common pitfalls include neglecting security protocols and inexperience in using advanced smart contract libraries. This highlights the importance of security: frequent audits are essential in strengthening blockchain systems, guaranteeing their intended function, and safeguarding stakeholder interests. Prioritizing smart contract security is vital for the ongoing development of blockchain businesses.