TL;DR
- Oracle acts as a bridge connecting blockchain with off-chain data.
- The oracle’s verification process of extrinsic information can alter the consensus mechanism
- There is currently no complete solution to the oracle problems
Introduction
Blockchain technology has the potential to change the entire world as it introduces new methods for recording, storing and managing data. However, blockchain today is still subject to the limited information and data. Therefore, oracles were created to help solve the problem. But the oracle itself is still not free from problems
In this article, we will have a detailed explanation about blockchain oracles as well as the famous “oracle problem” and if we can solve it.
What is a blockchain oracle?
Blockchain oracles are third-party services that connect blockchains and smart contracts with off-chain data – anything that is external to a blockchain such as weather data, financial market data, etc.
Since blockchains and smart contracts are, by definition, isolated systems, blockchain oracle works as a connection between them and the outside world, allowing interaction between an isolated system and the actual world.
Because they increase the capacity at which smart contracts can function, oracles are crucial components of a blockchain’s system. Smart contracts would only be able to access and utilize a small amount of data without oracles.
Types of oracle
Software oracles
Software oracles are internet-connected oracles. Today, most information, including weather data and crypto token price changes, is accessible with the press of a mouse. Then, smart contracts receive these data.
However, the main problem with software oracles is that users have to screen and choose the reliable source of information because there is too much data available online.
Hardware oracles
Hardware oracles, as opposed to software oracles, obtain information from real-world sources, where the data is contained solely within the intended object, such as IoT devices and movement sensors.
Hardware oracle has the drawback that information veracity cannot be guaranteed because data must be treated as private and safeguarded.
Inbound and outbound oracles
A blockchain system’s inbound oracle gathers data from the outside world and transfers it there.
The blockchain’s outbound oracles communicate information to the outside world. In terms of utilization, outbound oracles are less frequent than inbound oracles.
Centralized and decentralized oracles
A centralized oracle is one that is controlled and run by a single entity. Simply put, centralized oracles function similarly to the conventional financial system, where everything is controlled by a single entity. However, because they are dependent on a single entity, centralized oracles run the risk of being hacked or experiencing a bottleneck, which might bring down the entire system.
However, decentralized oracles do not rely on a single governing body; rather, they gather information from numerous sources, which strengthens the veracity of the data over time. Decentralized oracles are able to overcome their counterpar’s single point of failure issue because of the decentralization aspect. The smart contract will still be able to run regularly even if one of the oracles fails.
Decentralized oracles demand more investment in their architecture and upkeep, hence they are more expensive than centralized ones.
Human oracles
Given that they depend on individuals deciding on the truth, human oracles are also referred to as the “manual” oracle. Those with specific knowledge can act as an oracle by gathering data and vetting its reliability.
In circumstances where subjectivity is involved, human oracles are helpful.
Consensus-based oracles
The oracle of oracles, consensus-based oracles extract data and push it to smart contracts using a variety of oracles and consensus methods. Consensus-based oracles assist in ensuring that the data is valid and verified by utilizing a number of oracles.
What is the oracle problem?
In a Reddit post titled “The Oracle Problem” by Dalovindj from more than 8 years ago, the phrase “oracle problem” was first used. The oracle problem is a term used to describe the difficulty of validating actual data and events in a decentralized, trustless system.
Oracles are third-party services that provide blockchain systems with external data, such as price feeds and weather information, to trigger smart contracts. If the oracle is tampered with, it can result in incorrect data being fed into the blockchain system, potentially leading to financial losses, incorrect smart contract executions, and other security issues that compromise the integrity of the blockchain network.
For example, when a user initiates a transaction (A1), it passes through multiple intermediaries before being checked and recorded on the blockchain. However, if the transaction is modified to A2 at any point in this process and is not rechecked before being imported to the chain, it could result in a compromised system with potentially serious consequences.
So, the oracle problem in blockchain refers to the challenge of ensuring the accuracy and reliability of external data provided by oracles, without relying on centralized authorities. It is challenging since blockchains are intended to be trustless and decentralized, and depending on centralized authorities would be counterproductive.
How does the oracle problem affect real-world applications?
Healthcare
Health records, insurance, biomedical research, and many other areas of the healthcare industry can all benefit greatly from blockchain technology. Thanks to blockchain, the data may be transferred and kept in a secure manner.
However, the oracle can only do so effectively if and only if the facts and figures are open to public scrutiny. The oracles are susceptible to information leakage or manipulation when dealing with private data, such as medical records.
Supply Chain
One industry that stands to gain the most from blockchain oracles is supply chain management since it deals with data that contains information about the people and items engaged in the process. When it comes to assuring the clear, transparent, and safety of shipping commodities like food, medications, goods, etc., blockchain offers the much-needed security and immutability.
However, the production firm typically owns the oracle, thus even if the oracle service is outsourced, the company retains control over the data.
How can we solve the oracle problem?
Oracles must offer data security and reliability in order to address the oracle dilemma. Many people think that using several data sources could be the solution.
Diverse data sources can check the accuracy of information and lower the danger of tampering instead of relying on one source that is vulnerable to manipulation. The ETH/USD oracle network, for instance, comprises 31 nodes and is Chainlink’s biggest.
Decentralized oracles are another possibility. Decentralized oracles, as was already mentioned, do not rely on a single source of knowledge. Imagine it as a public library with a variety of books on the same subject, where everyone has equal access to the data from various sources. Decentralized oracles therefore aid in resolving issues with trust and dependability.
Final thoughts
It is undeniable that blockchain oracles are a great addition to the current blockchain ecosystem. It connects on-chain with off-chain information. However, it also comes with a huge problem and can be a setback for the decentralization process. Although it is not yet possible to completely solve the problem, there are some viable options to consider.
