If smart contracts on networks like Ethereum strive to achieve mass adoption across a wide variety of markets and use cases, the blockchain oracle problem is one of the most important barriers to overcome. Let's see what the oracle problem is and can be solved?
What Is a Blockchain Oracle?
If smart contracts are not used for cryptocurrency exchanges but rather for a decentralized mechanism that involves weather, stock prices, or political events, an external gateway is required. Oracles serve as a gateway, processing external and deterministic data and converting it to a format that a blockchain can understand. Therefore, Oracles are platforms that provide information about the real world to the blockchain in the blockchain environment.
A blockchain oracle is a secure piece of middleware that facilitates communication between blockchains and any off-chain system, including data providers, web APIs, enterprise backends, cloud providers, IoT devices, e-signatures, payment systems, other blockchains, and more.
Depending upon the traits governing source, the direction of information, and trust, blockchain oracles are classified as:
- Software Oracles
They interact with online information sources (databases, servers, websites) and pass it to blockchain smart contracts in real-time. The information comprises digital asset prices, exchange rates, real-time flight information, etc.
- Hardware Oracles
These oracles retrieve information from electronic sensors, barcode scanners, and other information-reading devices. Hardware oracles transmit real-world events into digitally understandable form to smart contracts for executing decisions.
- Inbound and Outbound Oracles
Inbound oracles send information from external sources to smart contracts. For example, the temperature measured by the sensor is notified to smart contracts. On the contrary, outbound oracles carry the information from smart contracts to the external world. For example, when funds get deposited to a particular address, the smart contract sends this information to a mechanism for unlocking the smart lock.
- Centralized and Decentralized Oracles
A single entity governs centralized oracles, while decentralized oracles do not rely on a single source to transmit the information to smart contracts. A single point of failure directly hampers the centralized oracles, while decentralized oracles build trust and are hence regarded as consensus oracles.
- Human Oracles
Individuals with specific knowledge in a particular aspect can also be regarded as oracles. With in-depth research, they can verify the authenticity of the information from various sources and transmit it to smart contracts. As humans are involved in verifying their identity with cryptography, the possibilities of fake identity fraudsters and data corruption get reduced.
- Contract-specific Oracles
These oracles are developed to be used by a single smart contract. As they are designed from scratch to serve a specific purpose, developers can tailor them to specific needs. They are time-consuming, expensive to maintain, and cannot be used to extract information from different sources.
Why do we need "Oracles" on the Blockchain?
As the blockchain problem is to reach consensus, extrinsic information cannot be provided along with transaction data, since other nodes would detect information coming from an “untrusted” source. Therefore, information coming from the real world should come from a third-party univocal source, whose reliability is undisputed for all nodes: the oracle. Oracles, in general, do not insert information into the blockchain directly; conversely, they gather and store data from the real world. When a smart contract concerning extrinsic data is executed, the code then calls for the right information from a trusted oracle. Oracles act as a bridge that can digest external and non-deterministic information into a format that a blockchain can understand.
The Blockchain Oracle Problem
Once data is reported to a blockchain, that data is now an immutable part of the history of the blockchain. If a smart contract is executed incorrectly based on that data, your contract is not only not doing what it was intended to do, but it can cause irreparable damage.
If your data is centralized (coming from one source) and that source is bribed, hacked, broken, or depreciated, your smart contract loses its purpose since the information provided to it is untrue.
The solution to the oracle problem is to have a decentralized network of oracles bringing different independent sources of data on-chain. In the last article, we've seen Chainlink solve this issue.
The oracle problem states that "as soon as you make a smart contract rely on a single central oracle, you have totally sacrificed any decentralization benefits."
The Blockchain Oracle Problem results from the inability of oracles to verify the integrity of their data.
As we said, Blockchains cannot access external data on their own.
Using centralized oracles negates the benefit of smart contracts — and introduces significant privacy issues.
As the oracles do not have the distributive attribute, the single point of failure is again introduced. The trustless peer-to-peer interaction needs to be eliminated in the oracles trusting their reliability, as they function based on the non-deterministic data. Implementing oracles through smart contracts could also hamper the users’ trust, who confide in blockchain more than the legacy network.
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Suppose the oracle is trusted and cannot be jeopardized. In that case, there is still a possibility that the data on which it is operating has been altered, in which case, despite being a trustworthy device, it will feed false data to the smart contracts.
On the other hand, if the information is trusted and verified, the oracle may fail to function properly on the smart contract due to a malfunction or deliberate tampering. From a game-theoretic perspective, it can be demonstrated that the higher the value of the smart contract, the greater the incentive to compromise the system.
The oracle problem is also triggered when real assets are attached to the blockchain via smart contracts. Linking a physical asset to a digital asset, whether fruit, cars, or houses, is critical in decentralized contexts (e.g., blockchain/smart contracts). Tangible assets are governed by the jurisdiction in which they are located, which means they are governed by something (in some cases, something more) other than the smart contract. Indeed, this entails having faith in something other than the smart contract. If a smart contract, for example, involves the transfer of property between two agents, the code will surely swap the certificate between the parties.
There is much research being done in this area to solve this issue. One possible solution is to use consensus oracles that must agree on a piece of data for it to be propagated to the network. This can be amplified by requiring these members to stake some token, giving them an economic incentive to choose correctly (if they go against the crowd, they lose their stake).
Can Blockchain solve its Oracle Problem?
Blockchains are highly secure and reliable because of a few specific design principles. A blockchain only needs to form a consensus on very basic binary questions using data already stored on its own ledger. The blockchain’s ledger is deemed to be true because it leverages decentralization to redundantly validate every piece of data using all the nodes in the network. It also uses decentralization to maintain the integrity of its consensus algorithm (PoW, PoS, etc.), ensuring the protocol rules only change when a substantial portion of the network signs off on it (e.g., 51%). These properties provide strong guarantees of computational and data storage determinism, especially in highly decentralized networks.
However, blockchains are not well suited to answer questions that delve into the realm of subjectivity or require external data that is not easily accessible to every node in the network.
Introducing subjectivity at the base layer of the blockchain opens up Pandora’s box to a whole host of security, reliability, and governance concerns, putting at risk the very value proposition blockchains aim to provide.
One major concern is how to ensure external data inputted into the blockchain is high quality? It’s extremely difficult to manage and enforce quality for off-chain data submitted by blockchain nodes since anyone can pseudo-anonymously run a node and submit answers, even if they are not willing to buy a subscription to a high-quality off-chain API.
Another major concern is scalability. Every time a new data source needs to be added to the network or an existing data aggregation method must be adjusted, it requires massive social governance coordination to get every node in the network to agree and upgrade their software. The addition of governance overhead leads to increased friction, slower development of core blockchain features (such as PoS and sharding), and major limits on oracle innovation. Ultimately, the more complexity there is at the base layer of the blockchain, the more attack surface, and risk to all applications that run on it. Even applications not using oracles or not involved with confrontational data requests will get caught in the crossfire and potentially get disrupted if the entire chain comes to a halt because of an oracle issue.
It’s for these reasons and many more that oracles are not integrated into the base layer of any major blockchain, but instead operate as separate networks. This ensures that blockchains have a lower attack surface and retain their determinism by maintaining a singular focus on consensus, while oracles have the required flexibility needed to generate determinism from a complex and subjective off-chain world without creating dependencies and limitations that put at risk all other applications.
While the use of oracle blockchain would improve the capabilities for accessing external data, it leads to many setbacks. The oracle problem points out one of the notable deviations from the basic nature of blockchain and smart contracts. In the long run, the blockchain oracle problem should go through comprehensive research for enabling the identification of effective solutions.
What matters now is that blockchain is gaining recognition as a viable technological intervention across different sectors. Will it be possible to empower blockchain-based applications with external information while safeguarding decentralization, we will see.
Sources:
https://blog.chain.link/what-is-the-blockchain-oracle-problem/
https://encyclopedia.pub/3718
https://cointelegraph.com/magazine/2021/12/30/can-blockchain-solve-its-oracle-problem
https://ethereum.stackexchange.com/questions/57071/what-is-the-oracle-problem-definition-exactly-and-briefly/84645
https://www.leewayhertz.com/chainlink-solving-blockchain-oracle-problem/
https://101blockchains.com/blockchain-oracle-problem/
