For the smart contract to carry out its predetermined operations, it relies on oracles to provide it with data from the outside world.
This supplemental info originates from software (a Big Data app) or hardware (Internet-of-Things).
Any information, such as the current temperature, the status of a recent payment, or recent pricing changes, could serve as such a condition.
Remember that a smart contract does not hold up the process because it does not wait for information to flow in from elsewhere.
Invoking the contract requires using valuable network bandwidth to get information stored elsewhere.
Therefore, this causes transaction costs in the network. On Ethereum, this resource is called “gas.”
What are blockchain oracles?
Blockchain oracles space allow smart contracts to function in accordance with external data and information.
Oracles provide the Web 3.0 ecosystem with a means of integrating with preexisting infrastructures, such as databases and specialized computation tools.
Complex decentralized apps (DApps) that respond to real-world events and interact with legacy systems can be built with the help of hybrid smart contracts, made possible by decentralized oracle networks (DONs).
The hypothetical example is Alice and Bob wanting to bet on a horse race.
Alice has wagered $50 on team X, while Bob has wagered $30 on team Y, with the amount escrowed in a smart contract.
When the game is ended, how does the smart contract determine whether to pay Alice or Bob? The solution is an oracle system, which can retrieve correct match outcomes off-chain and consistently send them to the blockchain securely.
Given the same information, all nodes in the network must arrive at the same conclusion, thanks to the distributed ledger nature of the blockchain.
For instance, the result of a node’s attempt to validate a transaction generated by another node will vary. The design of this system is guaranteed to work every time.
Consensus is an essential part of what makes blockchain possible.
Nodes in a blockchain network need to be able to achieve a consensus on a data value using the consensus method, and this method requires determinism.
Maybe you’ve heard of proof-of-work (PoW) with Nakamoto consensus or proof-of-stake (PoS) with Byzantine consensus.
To be truly effective, though, the blockchain ecosystem must integrate with the offline world. The cost of Ether (ETH) and other cryptocurrencies must be written into a contract before DeFi may exist.
To offer decentralized, trustless insurance, we need access to meteorological data.
One of blockchain’s most important applications, smart contracts, can’t be implemented without access to relevant information.
Keeping this limitation in mind, how do we bridge dimensions?
The purpose of this guide is to present some blockchain oracle initiatives and to clarify what blockchain oracles are and how they work.
Solving the Oracle Problem
The blockchain oracle dilemma illustrates a severe shortcoming of smart contracts: their inability to interact with resources outside the blockchain.
Data that has already been stored on the blockchain is said to be “on-chain,” while resources that are not part of the blockchain are said to be “off-chain.”
Being purposefully disconnected from other networks is how blockchains achieve their most desirable characteristics, such as unanimous agreement on the integrity of user transactions, resistance to double-spending attacks, and reduced network downtime.
A blockchain needs an extra infrastructure called an “oracle” to interact with off-chain systems securely.
Oracles and smart contracts have widespread applications, from the financial sector (asset pricing) to the insurance sector (weather data), to the gaming sector (randomness), to the supply chain (Internet of Things sensors), and even the government (identity verification).
Most smart contract use cases, including DeFi, necessitate access to off-chain, real-world data and events, making the oracle problem crucial.
As a result, oracles allow blockchains to accommodate a wider variety of digital agreements by providing a uniform access point to off-chain resources without compromising the blockchain’s crucial security.
The accuracy of the oracle mechanism is of the utmost importance to ensure that a smart contract performs as intended when deployed on a blockchain.
What Does Blockchain Oracle Do?
The phrase “blockchain oracle” describes any system or organization that links a definable blockchain to information outside the blockchain.
Every bit of data fed into these oracles goes through a third-party transaction first.
Nonetheless, we know the blockchain has everything built to verify its integrity in this way.
Oracles are considered blockchain middleware because they are crucial in bridging the virtual and physical worlds.
Because of its ability to solve the issues of centralized smart contracts and external data access, Chainlink has become the de facto standard for decentralized oracles. Chainlink oracles—what exactly are they?
Chainlink is a distributed oracle network that provides data from the outside world to smart contracts stored in a blockchain.
LINK tokens are a form of digital asset tokens that may be spent on a variety of network services.
A decentralized, blockchain-secured smart contract is meant to eliminate single points of failure, yet a central oracle creates them.
If the oracle turns out to be flawed or hacked, how can you be sure that the information you rely on is reliable? What good is a trustworthy blockchain-based smart contract if the information it uses is iffy?
Chainlink (a distributed network of nodes) addresses this issue since it employs oracles to connect off-blockchain data sources with smart contracts hosted on the blockchain.
With this method and other forms of secure technology, we can avoid the reliability issues that may otherwise occur from relying on only one central location.
Chainlink is agnostic to specific blockchain implementations since it provides a standard abstraction layer for inter-network communication while still linking all major public and private blockchain settings uniformly.
In this way, you may use a service like Chainlink, which is like a public library but for decentralized data, to use off-chain information that has already been taken from the physical world and collected.
Even better, you can build your customized oracle networks out of interchangeable modules to get the precise data you need.
Not only that, but you can also do computations outside of the blockchain and send information to the physical world.
Additionally, Witnet, Paralink, Provable, and Dos.Network are all excellent blockchain oracles. Oracles provided by these services are composed of a smart contract and some off-chain components, allowing them to query APIs and transmit transactions to the smart contract to keep its data up-to-date.
Types of Blockchain Oracles
Blockchain oracles can take different forms with so many options for off-chain data sources. Each oracle has another purpose, but they all collect, verify, process, and transmit information.
Hybrid smart contracts involve not only a wide range of external data and computation but also a wide range of delivery mechanisms and security standards.
Input Oracles
Input oracles are the most well-known sort now in use; they are responsible for bringing data from the real world (off-chain) and delivering it to a blockchain network where smart contracts may use it.
Chainlink Price Feeds, powered by these oracles, give DeFi smart contracts direct on-chain access to financial market data.
Output Oracles
In contrast to input oracles, “output oracles” permit smart contracts to issue instructions to off-chain systems, which in turn cause those systems to carry out the contracts’ specified activities.
After an on-chain rental payment is made, the system can notify a banking network to process a payment, a storage provider to archive the provided data, or an Internet of Things (IoT) system to unlock a car door.
Cross-Chain Oracles
Cross-chain oracles are another sort of oracle that may transfer data between blockchains.
Data on one blockchain can be used to trigger an action on another, and assets can be bridged cross-chain so they can be used outside their native blockchain with the help of cross-chain oracles.
Compute-Enabled Oracles
Oracles that use secure off-chain computation to provide decentralized services that are impractical to do on-chain due to technical, legal, or financial constraints are becoming increasingly popular in smart contract applications.
Some examples of this are using Chainlink Automation to launch smart contracts in response to predetermined events, running a verifiable randomness function to ensure that contracts have access to an unchangeable and provably fair source of randomness, and computing zero-knowledge proofs to generate data privacy.
Conclusion
It is crucial to the widespread use of blockchains that a dependable mechanism allows smart contracts to interact with the outside world.
There would be a significant reduction in the potential of smart contracts if they were restricted to using only data already available within the blockchain.
To reduce the overall amount of systemic risk in the blockchain ecosystem, decentralized oracles could bring new protection mechanisms.
Oracles on the blockchain are still an important component that needs to be deployed safely, trustworthy, and trustless for the blockchain ecosystem to flourish.
