Blockchain Oracle enables smart contracts to interact with off-chain systems to effectively implement contract terms.
Blockchain Oracle is important because smart contracts living on blockchains do not have access to data outside the chain.
Enabling smart contracts to operate using off-chain data profiles improves the value of decentralized applications (dApps).
The Oracle problem refers to concerns arising from a decentralized system based on a centralized system function.
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| What is Blockchain Oracle and how it automates smart contracts |
The word "oracle", derived from Greek, speaks of an individual who communicates directly with the gods and expects the future. In ancient times, people had little knowledge about current and future events. As such, they relied on Oracle to gain knowledge beyond their understanding. In the context of blockchain, oracles connect blockchains to the outside world and act as bridges.
This guide answers questions:
- What is Blockchain Oracle?
- How does Blockchain Oracle work?
- Why is Blockchain Oracle important?
- What is the problem with Blockchain Oracle?
- What are the types of Oracle blockchains?
Let's get answers for each of them in separate sections within this article.
What is Blockchain Oracle?
Blockchain Oracle is a data summary that sources verify and transfers data outside the chain (data from other blockchains and the outside world) to smart contracts that live on the blockchain. In addition to obtaining data outside the chain and transferring it to the blockchain, the oracle can transfer data from it to external systems. For example, oracle opens a smart lock once the user has paid through a blockchain transaction.
As mentioned earlier, oracles act as bridges connecting systems on the chain, such as smart contracts, with data providers outside the chain/abroad. This expands the range in which smart contracts operate. In other words, smart contracts will have a limited application without Blockchain Oracle since they will only have access to the data on the chain. Oracle offers a mechanism to activate smart contract functions using reliable external data.
Note that blockchain Oracle is not the source of data. Instead, it is the system that inquires about, confirms, and certifies data sources outside the chain, and then transmits this information to the blockchain network. The data sent can be prices and exchange rates for assets, natural disasters and risk measurements, statistics, dynamic data (time measurement), political activities, games, geolocation and tracking data, events in other blockchains, etc.
How does Blockchain Oracle work?
In general, Oracle consists of a smart node that works on the chain and some elements outside the chain. The contract receives requests for data from other chain-related applications and deports them to the off-chain part (known as Oracle). The oracle node can essentially query data sources through the APIs, migrate the extracted information, and store it on the blockchain.
Here is an example of how the Oracle blockchain works:
Suppose Alice and Bob bet on the outcome of the 2024 US presidential election. Isn't it strongly convinced of a Republican candidate winning, while Bob supports Democrats winning? They put clear terms and conditions around the bet and closed their shares in a smart contract. The smart contract will free up funds for the winner after the 2024 election results are announced.
Remember that smart people don't know what happens outside the chain - in this case, the outcome of the 2024 US presidential election. When the specific timeline reaches the election or after, Oracle inquires about a reliable API to find out which candidate won and transmits information to the blockchain. The smart contract then uses the transferred information to release the money to the winner.
Without Oracle query and transmission of information on the chain, there will be no effective way to settle the bet freely and fairly.
Why is Oracles Blockchain important?
Users of digital currency view smart contracts as lines of code that operate in specific addresses on the blockchain. These smart contracts are self-governing computer programs capable of implementing agreements between parties once pre-defined conditions are met - hence why they are called "smart contracts."
However, using smart contracts to implement agreements between parties in inevitable systems, such as blockchain, is a complex problem. The inevitable system always produces expected results under a fixed condition and certain inputs - there is no difference in computing outputs from inputs. To ensure inevitable implementation, the blockchain only needs to form a consensus on basic binary questions based on data already stored in its ledger. Examples of bilateral questions include:
- "Did the portfolio owner (identified by public key) agree to this transaction with the correct private key?"
- "Does this portfolio contain sufficient funds to make transactions?"
- "Is the transaction binding in the context of this smart contract?"
If the blockchain is the source of information from systems outside the chain, the inevitability will be difficult. Since data outside the chain may change significantly, this limits the contract's reaching consensus on the legitimacy of changes in the blockchain situation. For example, consider a smart contract that carries out a transaction based on the current BTC-USDT exchange rate source from the Standard Price API. The number is likely to fluctuate a lot, along with the risk of hacking or damaging the API. This means that the contract performing the same contract code will produce different outputs.
Inevitability is an integral part of any general blockchain, with many nodes spreading around the world. In the absence of a central authority acting as a source of truth, we expect the contract to produce similar results from duplicate transactions. A scenario in which the A node implements a smart contract code and reaches "4" as an output, while the B node reaches "10" after completing the same transaction would unravel the blockchain consensus and its value as a distributed computing system.
The above example also illustrates the problem of allowing the chain of blocks to source information from sources outside the chain. However, oracles solve this problem by "withdrawing" information from external sources and transferring it to the blockchain for use in smart contracts. Since the data on the chain is unchangeable and generally accessible, this allows blockchain nodes to use data outside the chain securely to make changes without breaching consensus.
Blockchain Oracle Problem
The Blockchain Oracle problem relates to external data sources to the blockchain. It is important to ascertain the validity of this data - otherwise, smart contracts will use false inputs to produce incorrect outputs.
Since smart contract transactions are irreversible, we must ensure Oracle's entry is correct. Imagine a smart contract launching a $100 million bet for the wrong winner because of an incorrect entry! That would be disastrous, given that the smart contract is immutable and users' identities are hidden.
Another problem is that Oracle (especially the central revelation) can serve as a central point of failure, prone to hacking and manipulation. This may cause unhealthy execution of smart contracts, resulting in unintended consequences. In addition, using oracles can lead to confidence issues, as users have to trust that Oracle provides accurate information.
However, there are ways to address the problem of Oracle blockchain. One uses several oracles to provide the same data, increasing access to accurate information. The second solution is the use of a decentralized oracle, ensuring the use of non-tamperable data. As the adoption of blockchain technology continues to grow, new solutions to the Oracle blockchain problem are likely to be developed.
Blockchain Oracle Types
Oracles can be classified into two broad categories: centralization and decentralization. Let's discuss them separately, including their advantages and disadvantages.
Oracle Central
Central Oracle is a system that serves as the only source of truth for the data or information needed by the blockchain network. oracle acts as an intermediary between blockchain and the outside world, providing information for smart contracts on blockchain as required.
A central oracle usually runs on a server or set of servers and is controlled by a single entity or organization. It is responsible for collecting data from various external sources, such as APIs and web dredging, and then coordinating the data and transferring it to the blockchain. It can be proven as a typical example of a central oracle. Oracle Contract uses data to implement contract terms.
Advantages
- There is no single point of failure: a decentralized oracle is unlikely to be penetrated or closed because one entity does not control it.
- Transparency: Transactions are recorded on a decentralized oracle in the general ledger before being moved and stored on the blockchain.
- Resistance to censorship: decentralized revelation is resistant to censorship because it is not controlled by a central authority.
- Anti-tamper: The data stored on a decentralized oracle is secured using encryption, making it non-manipulable.
Downsides
- Complexity: Decentralized setting and operation can be more complicated than a central oracle.
- Scalability: Decentralized oracle can be less scalable than a central oracle because it relies on a distributed network of nodes.
Blockchain Oracle expands the capabilities of smart contracts by providing access to out-of-chain resources as an integral part of harnessing useful and improved hybrid smart contract applications. Like the way the Internet has radically changed information sharing, Oracle-based smart contracts have revolutionized how people exchange value and implement automated contractual agreements.
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