Understanding Blockchain Oracles for Smart Contracts Advancement

Published : Aug 03, 2021

oracles smart contracts

  • Do you know what blockchain oracles are? If you didn't know about them and wanted to learn more about them, you've come to the right site. Blockchain technology can transform the world. It does, however, necessitate an ecosystem in which it can smoothly interface with various services and solutions. Blockchain oracles allow the technology to extend the potential of smart contracts developmentSo, how does it accomplish this? Let's have a look.

    Understanding Blockchain Oracles?

    Third-party services are known as blockchain oracles offer smart contracts with external data. They act as a link between blockchains and the rest of the world.

    Off-chain data is inaccessible to blockchains and smart contracts (data that is outside of the network). However, to carry out numerous commercial agreements, it is necessary to have important information from the outside world.

    Here blockchain oracles come in, as they serve as a bridge between off-chain and on-chain data. Oracles are critical components of the blockchain ecosystem because they expand the range of smart contracts. Smart contracts would be useless without blockchain oracles because they would only access data from within their networks. A blockchain oracle is a layer that searches, validates, and authenticates external data sources before transmitting that information. Oracles send data in a variety of formats, like market prices, transaction confirmation, or the temperature detected by sensors. 

    A Smart contract needs activation by using network resources to access data from the outside world, a. Some oracles can not only relay information to smart contracts but also send it back to external sources.

    Furthermore, the data transmitted by the blockchain oracle can be any valuable data. For example, a healthcare system could use oracles to request insurance-related data. On the other hand, the food industry can use oracles to transmit information about the food supply chain.

    Also, Read | Understanding DeFI Flash Loans and How to Make them Secure

    Various types of Oracles

    Oracles as Software

    They handle information data originating from online sources, such as temperature, commodity and goods prices, flight or train delays, and so on. The software oracle extracts the required data and inserts it into the smart contract.

    Oracles as Hardware

    Some Smart contracts require data directly from the physical world, such as a car passing through a barrier where movement sensors detect the vehicle and send the data to a smart contract.

    Oracles - Inbound 

    Provide information from the outside world

    Oracles - Outbound

    Give smart contracts the ability to send data out into the world. An example can be a Smart lock that receives payment on its blockchain address and unlocks automatically.

    Consensus-powered Oracles

    Data sourcing happens from human consensus and prediction markets such as Augur and Gnosis. Using only one source of information could be dangerous and untrustworthy. Prediction markets use a rating system for oracles to avoid market manipulation. For added security, a combination of different Oracles can come in use, with three out of five oracles determining the outcome of an event, for example.

    The issue with oracles is that people must rely on external sources of information, whether they come from a website or a sensor. Blockchain oracles are not subject to the underlying security mechanisms. It is because they are third-party services that are not part of the blockchain consensus mechanism. Man-in-the-middle attacks can occur by standing between contracts and oracles.

    It is critical to ensure the robustness of this "second layer." Varied authentic computing strategies can address these challenges. However, because safe oracles constitute a barrier to smart contract security, this problem will require additional research.

    Also, Read | Smart Contracts Development for DeFi | A Guide for Investors

    Use Cases for Blockchain Oracles

    Market for Forecasting

    Decentralized prediction markets such as Augur and Gnosis use crowd wisdom to forecast the future condition of the market. Multiple oracles or off-chain event settlements capture knowledge in these marketplaces.

    Defi (Decentralized Finance)

    The convergence of Smart contracts and money has heralded the era of Decentralized Finance (DeFi). These products require access to authentic data streams, which oracles may supply.

    Insurance Services

    We can use oracles to purchase insurance policies on the blockchain. Fraud is a common problem in insurance. Blockchain and the dependability of oracles are an ideal combination to resolve this problem.

    Shipment Management

    Oracles can provide reliable position mapping for dApps to track shipments by replacing conventional, centralized GPS systems.

    Stability in Stablecoins   

    Dai stablecoin of MakerDao relies on a network of numerous oracles to continuously report the price of Ether to it. They continually inform the price to determine whether the network needs to combine or liquidate their collateral to ensure price stability.

    Also, Read | The Increasing Importance of Stablecoin Development

    Maintaining the Dependability of Oracles 

    We can ensure the dependability of oracles using the following techniques:

    • Numerous data sources
    • Several Oracles
    • Mechanisms for incentivization
    • Execution environment that can be relied on/also known as TEE

    Numerous Data Sources

    If your Oracle collects information from several data sources, the likelihood of acquiring incorrect information is low. The oracle, on the other hand, can operate as a point of failure.

    Several Oracles

    Another technique is to collect data from several oracles, which eliminates the single-point-of-failure problem. However, there is a risk that the bulk of these oracles may have compromised information sources.

    Mechanisms for Incentivization

    Oracles can borrow a page from the Casper protocol and include a stake-slashing mechanism to ensure that the actors involved getting incentives to perform truthfully. The key here is to integrate a type of tokenomics that forces Oracle network nodes to conduct honest work and behave decently. If they perform well, they get rewards. If they do not, they might receive punishment via a cutting mechanism.

    Also, Read | Emerging Blockchain Use Cases and Solutions across Industries

    Reliable Execution Environment/also known as TEE

    TEEs enable a program to run in a secluded environment known as an enclave, which provides hardware safety. The enclave consists of:

    • Ensures the integrity of a system
    • Maintains the confidentiality of operations
    • It enables the application to access and write memory not included within the enclave.
    • In other words, it can demonstrate its honesty and work ethics without divulging specifics about what they are doing.

    For more information, connect with our team of blockchain development experts.

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