A Comprehensive Guide To Blockchain Oracles

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Blockchain oracles allow bridging between blockchain and external systems. These solutions use smart contracts to execute certain tasks. Oracles play an important role in the Web 3.0 infrastructure by allowing links between blockchains and existing external systems.

Oracle networks are being developed on decentralized platforms and are being used to create hybrid contracts between blockchains and applications outside the blockchain technology. This allows for the creation of decentralized applications which can take input from the outside world to execute the smart contracts it makes.

For example: if two people place bets on the outcome of a football match, a smart contract for this bet can be made, and $100 ($50 from every participant) can be held in escrow by an oracle. This is where the algorithm comes into play and determines which participant wins the bet.

The oracle will have all the tools needed to determine the exact outcome of the football match and will release the prize money to the right bettor. Different nodes are used by these oracles to check whether the result across all the nodes is the same or not. Whenever a node has a different result than all of the other ones, it won’t be included in the consensus.

Consensus is used by all the nodes to reach a solution and agree to validate a transaction. Different examples of this process are Proof of Stake and Proof of Work. Consensus is behind the working principles of blockchain technology.

Oracles are used to connect both the virtual blockchain world and the real world. This includes adding Ethereum and every other cryptocurrency into a smart contract that reflects their price. Moreover, access to the biggest data platforms is also needed in order to materialize this dream. This is the main problem blockchain oracles facing these days.

In this article, we will discuss all the challenges faced by blockchain oracles and how these problems are being solved these days.

Significance of Blockchain Oracles

Currently, smart contracts are facing connectivity issues across multiple blockchains. There is no way for smart contracts to connect with data systems outside of their native infrastructure. Therefore, all of the data is distributed into off-chain and on-chain. On-chain data is all of the data which is currently present within a blockchain system, and off-chain data is the one that isn’t present in that system.

Data isolation is purposefully applied to blockchain to achieve benefits like fast transactions, quick user authentication, and double spending prevention. This way, the network downtime on a blockchain is minimized. Oracles are designed to bridge the gap between off-chain and on-chain data easily. With the help of this method, the problem of DeFi applications requiring real-world data outside of their native blockchain can be resolved. Oracles create hybrid smart contracts, which give a DeFi application access to both types of data without compromising on any benefits of the blockchain technology.

Typical use cases for oracles in the blockchain ecosystem can be finance applications, government-backed identity checks, and weather data required by DeFi weather applications. Many other industries can also benefit by using oracles to establish a secure connection with blockchains.

How Do Blockchain Oracles Work?

Oracles are defined as applications that connect blockchains with any type of data that is available off-chain. These oracles use their uniquely developed algorithm to make their working possible.

No matter how oracles are used, they don’t mess with the internal identity of a blockchain. They are the only way through which blockchains can be connected to the outside world.

One of the best examples with regard to blockchain oracles is the Chainlink Network. It is one of the most trusted and used oracle networks because of its seamless data integration. It also makes hybrid smart contracts really easy. Let’s take a brief look at what Chainlink actually is.

Chainlink network is used to add outside data to blockchain-based smart contracts in a decentralized manner. The native token for this network is LINK and is used by traders to pay for the network fees in every transaction.

If the only blockchain oracle we have is centralized, we won’t know for sure if our data is actually safe while using it or not. Moreover, it provides us with a single point of failure. If the data being fed into the smart contract is not correct, it will serve no good purpose for a blockchain oracle.

This problem is also neutralized with the help of Chainlink, which is actually a network of multiple nodes. It verifies off-blockchain data through all of its nodes and feeds the data into the on-blockchain hybrid smart contract. This is the perfect solution to any reliability issues which might arise if the only source of information is centralized.

Chainlink is used to connect every blockchain in existence, no matter if it is private or public. This is how cross-network data and asset transfers are achieved in a decentralized manner.

So, you can use services like Chainlink to extract real-world data and transfer it to the decentralized blockchain network. This system works like a public library. Specific blockchain oracles can also be made to obtain a specific type of off-chain data required for a project. On-chain data can also be outputted to the outside world by using the same oracles.

There are lots of other popular oracle networks as well. The contracts made by these oracles contain data both from the outside world and some off-chain data as required by the specific application. User interfaces used in these applications can update data in smart contracts regularly.

Different Types of Blockchain Oracles

Oracles enable blockchain-based smart contracts to interact with external data outside the blockchain ecosystem as well. This is how oracles connect blockchains with the outside world. Just like in the betting example mentioned above, oracles are needed in situations when hybrid smart contracts are needed to connect both the blockchain data and the real-world data sources. More nodes are used to verify external data and import it into the blockchain smart contracts. This is how data transparency is ensured in blockchain oracles.

Let’s go through the different types of blockchain oracles being used these days.

Oracles analyze every type of data that goes through them. This is how hardware and software oracles are differentiated. Physical world events are captured by hardware oracles, and digital data sources are analyzed by software oracles. Hardware oracles capture and analyze data collected by sensors and motion cameras. On the other hand, data from digital sources, like exchange rates and match results, can be easily analyzed by software oracles and transferred to blockchain-based smart contracts.

In the case of centralized oracles, a singular central authority acts as the only source of data that is used in a smart contract. However, this isn’t an effective way of sourcing data, as the truthfulness of the data can only be verified by that central authority. If a hacker or fraudster attempts to sabotage the contract, they can easily do that. This is the main reason why having a single point of failure isn’t recommended in blockchain oracles.

Decentralized oracles work just like public blockchains. That’s because they have features that keep the risk of data tampering to a minimum. Since multiple nodes are used to verify data, there are no chances of data being compromised, like in the case of centralized oracles. Decentralized oracles consult various nodes to verify if the data is reliable or not. This is the main reason why decentralized oracles are also called consensus oracles. These oracles can also be used by other blockchain projects to verify data.

Oracles that take information from multiple data sources and then use computation to come up with a single result are called computation oracles. They are different from other oracles in the way that they can execute computation tasks off-chain. This process is particularly beneficial in cases like the Ethereum blockchain, which has a very high cost of computation. This type of oracle is better than the ones which simply receive and supply data. So, computation oracles can perform complex tasks on their own to handle data in a decentralized manner.

There are also contract-specific oracles that only work with specific contracts. This way, multiple oracles are needed to make them work with multiple digital contracts. The inconvenience of making lots of oracles for multiple contracts is the main reason why contract-specific oracles aren’t used very often. These oracles are only fit for use in niche situations.

People with expertise in a specific field can also act as oracles. There experts can receive information from more than one source, verify it and input the verified information into smart contracts. Any type of impersonation can be avoided with the help of cryptography, which is used to verify the identity of that expert. This is how humans can be used as oracles as well.

Depending on the data an oracle receives and sends, it can also be specified as an inbound or outbound oracle. Two-way communication is made possible with the help of these oracles. Just as their name suggests, outbound oracles can export data from the blockchain to the outside world.

On the other hand, inbound oracles are used to import data from the outside world into the blockchain. The imported and exported data can depend on the specific use case in question. Inbound and outbound oracles can be used in forex markets to execute specific orders upon reaching specified prices for assets or currency pairs.

Oracles are developed to perform specific tasks and control hybrid smart contracts.

Here are the tasks usually performed by these oracles.

  • They collect data from sources outside the blockchain infrastructure.
  • They incorporate the collected data in smart contracts to make it easily accessible.
  • They execute smart contracts and provide data to the blockchain on demand.

Smart contracts can be automatically controlled and executed by the blockchain behind them based on the accomplishment of certain milestones set in that contract. The Ethereum blockchain can also access these oracles to see any type of data.

Here’s how you can easily set up an oracle.

Request-response Oracles

If the data storage is too large to be easily stored on a smart contract, only specific portions of it are accessed by the oracle. Businesses who provide data can use these types of oracles, but they’re one of the hardest to set up.

All of the smart contracts in these oracles are stored on the blockchain, and a system of data is made off-chain to process the requests and provide relevant data. Decentralized applications can request data by going through a chain of multiple commands.

Immediate-read Oracles

These oracles are designed to provide data whenever requested. These oracles usually respond to simple and straightforward queries. These oracles are activated only when a certain type of data is needed by the system.

Publish-subscribe Oracles

These oracles are used to display data and regularly update it depending on the market. The whole function in the case of these oracles is controlled by a smart contract or an off-chain data provider.

These oracles can be mostly seen in weather apps and price updates.

Blockchain Oracles in Decentralized Applications

Since lots of DApps need to use both the on and off-chain data to function properly, oracles have been developed to bridge the gap between blockchain and the real-world data for these apps.

Here are some examples of oracle uses in DApps.

  • Decentralized flight statistics can be provided by oracles.
  • Prediction apps can use oracles to execute the bets automatically.
  • Damage verification in insurance claims can also be automated with the help of blockchain oracles.
  • Tracking the supply chain can also be done automatically with these oracles.
  • Exact time measurement can be done with the help of oracles.

Security Concerns Associated with Blockchain Oracles

While oracles promise lots of benefits, they pose a serious risk to the reliability of smart contracts as well. That’s because oracles depend on off-chain data to execute smart contracts. If wrong data can be used to manipulate smart contracts made with oracles, it can destroy and trust people have in smart contracts.

Therefore, whenever you want to implement an oracle solution, make sure that a trustable oracle system is used. Avoid any type of data input sources that are prone to be compromised. By taking care of the data security issues, we can make oracles one of the best things in the decentralized finance industry.

Decentralized oracles with validator nodes can be used to address data security issues. This is the key aspect of the oracle technology, which needs to be taken care of before we can use oracles everywhere.

Use Cases of Blockchain Oracles

Let’s take a look at some of the best use cases for blockchain oracles.

Prediction

If a person is participating in a lottery, they’ll need to make sure that the prediction system used by the lottery is decentralized and transparent. While this might only look like picking up a random number, it is way more complex than it seems to be, and there have even been lottery scams in the past. Usually, the owner of the lottery is behind any manipulation.

However, if we decentralize the lottery system with the help of a smart contract, oracles can be used to generate random numbers without taking input from anyone. Decentralization means impeccable security.

Betting

Betting is another domain that can easily benefit from the use of oracles. Based on the future outcome of an event, people can enter smart contracts and leave their money in escrow. Later on, smart contracts can be executed automatically by taking the input of the event through multiple off-chain sources. This way, the winner will automatically be paid.

Insurance

Insurance companies need to analyze and verify data from multiple resources before accepting or denying insurance claims. Therefore, oracles can be used to receive relevant data from the client and can be analyzed with the help of nodes in an automatic manner. In a more modernized version of this system, the car sensor data can be automatically fetched by the smart contract before executing the contract and releasing the insurance funds.

Takeaway

Oracles are actually hybrid smart contracts that use data both from the blockchain and from off-chain resources to execute certain tasks. In order to analyze the outside data, multiple nodes can be used by an oracle to receive the off-chain data and see if the contract is receiving the data version of data or not. When certain requirements outlined in an oracle are met, it executes the specified task.

There are various different types of blockchain oracles that are designed to work differently. For example, humans can be used as nodes. An expert can be assigned as a node to verify the data they receive. Moreover, decentralized data sources can be used in the development of oracles to make sure that the data used is reliable and accurate.


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