These four concepts will help you understand blockchains

Below are four key terms you need to know to better understand how blockchains provide these functions and how they apply in business contexts.

External connectivity enables new applications.

For blockchains to be useful, or to create any of the advanced applications listed above, requires access to external data. One of the most important aspects to remember about blockchains is that they are not inherently connected to anything outside of them. Blockchains are purpose-built this way for higher levels of security, but a closed blockchain system is like a computer without the internet – interesting and useful, but not nearly as much as being connected to the internet.

The introduction of external data can compromise the security of the blockchain. While blockchains themselves are highly secure, connecting a smart contract to external data presents a new attack vector, meaning that a malicious actor does not need to overcome the blockchain’s security architecture to exploit smart contracts; they just need to manipulate the data source and run the smart contract in a way that benefits them.

However, Oracle networks securely connect blockchains to real-world data, which in turn enables the advanced applications that users demand. Instead of getting information from a single source—say, the USD price of Ether (Ethereum’s native blockchain cryptocurrency)—oracle decentralized networks like Chainlink aggregate multiple different sources to smooth out errors and protect against manipulation.

When smart contract developers obtain data through the Oracle network, attackers cannot abuse the system by manipulating a single data source. They must simultaneously target as many data sources (be itfive, ten, or more) as the smart contract requires input to execute the command, which is highlyunrealistic as networks become more decentralized.Without an oracle network, developers would also not need to use blockchain for use cases that involveinteracting with the real world, as there is no guarantee that the data triggering smart contracts areaccurate. Although not an inherent feature of blockchains, oracle networks are critical to driving the wideradoption of blockchain technology. The realization of the full potential of the blockchain is conditional onthe successful development of a new generation of applications powered by Oracle networks.

Decentralization ensures uptime and securityAs mentioned above, a blockchain network is made up of hundreds, or even thousands of nodes, each ofwhich carries an identical copy of all the information ever recorded on-chain. Blockchain architecture isdecentralized — no single, centralized identity is responsible for record-keeping or controlling the system.This design has multiple benefits. For one thing, redundancy helps guarantee uptime. If one node goesdown, there are plenty of other nodes with identical information to keep operations running. Additionally,malicious actors cannot compromise a blockchain by attacking one node. They need to successfullycontrol the majority of the network, which is extremely expensive and resource-intensive, posing asignificant challenge to even sophisticated attackers while automatically weeding out low-effort exploitattempts.

Immutability promotes transparency and accountabilityBlockchains are also immutable, meaning that once something is added to the blockchain, it cannot bereversed or deleted. Changes to existing information are recorded by adding new data blocks that showthe modifications made. Even if the data changes, each network participant has a record of the initial stateof the information.This setting creates a trusted system. People operating individual nodes do not need to trust each other,because the real state of information is available to all participants with high barriers to manipulation.Bitcoin’s implementation of the trustless exchange of value was transformative because for the first timein history complete strangers could reliably exchange value without an intermediary such as a bankabsorbing some of the funds and creating inefficiencies. Since all participants are working with the sameinformation, there is no way for one party to manipulate transactions or violate the contract. With allinformation and changes visible in the chain, the system offers unparalleled visibility. For example,companies looking for better supply chain traceability can use blockchain to explore a product’s entirelifecycle, using IoT sensors to provide information about location, date, quality, certifications, and morein the chain.

Smart power automation contractsBlockchain-based applications or decentralized applications (dApps) are essentially collections of smartcontracts. Developers are turning to dApps with the same guarantees that blockchains provide, includingincreased security, immutability, and decentralization. Ethereum was the first blockchain to offer widelyavailable smart contract functionality enabling the development of dApps. Without smart contracts,blockchains are generally only useful for minting and moving tokens.Once externally connected, smart contracts can be used to automate business processes by serving ashighly reliable and secure forms of digital agreement. This is where real efficiency and cost savings startto happen. Take the example of rain insurance: An individual agent no longer needs to verify thatqualifying conditions have been met in order to approve a payout. Rather, the funds are held in escrow aspart of a smart contract, and when IoT sensors indicate insufficient rainfall has fallen in a certain areawithin a predetermined time frame, the farmer is automatically paid. Because the contract is linked toreal-world data sourced directly from the region and verified by organizations such as the NationalOceanic and Atmospheric Administration, the insurer does not have to worry that funds have beeninappropriately allocated. This system simultaneously reduces insurance fraud, ensures faster payouts forfarmers, and expands market opportunities for providers who can reduce costs with automated policies.While most business decision makers may not understand all of the technicalities of blockchain,understanding these four fundamental elements can help organizations determine how blockchaintechnology can best serve them. By moving business functions to the blockchain, significant automationand cost savings benefits can be achieved, and leading organizations are already making the transition.As more and more organizations seek to incorporate blockchain technology, they can also take advantageof middleware solutions like Chainlink to ease the transition. Chainlink enables businesses to connectlegacy backend systems as well as external data to blockchains. With these capabilities, organizations cannot only connect to the off-chain data they need to develop advanced applications, but also seamlesslyleverage the decentralization, immutability, and automation of blockchains in line with their existingsystems.By understanding the underlying principles of blockchain technology and considering their approach tointegrating their existing processes with the smart contract economy, business leaders can position theircompanies to take full advantage of the value that Web3 represents.

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