What is Blockchain Oracle Problem and how Chainlink solves it? (2024)

Regarding blockchain technology and smart contracts, the oracle dilemma concerns the credibility and dependability of oracles. Curran defined the Oracle dilemma (in the blockchain) as "the security, authenticity, and trust conflict between third-party oracles and trustless execution of smart contracts." According to the author's knowledge, the concept’s origin may be traced to a Reddit post by Dalovindj before the debut of the Ethereum ecosystem for smart contracts. The blogger noticed that validating the reliability of extrinsic information without affecting the consensus method was difficult while executing an application on the bitcoin blockchain about crowdfunding or gambling.

Egberts elaborated on the disadvantages of the oracle problem in his dissertation, primarily portraying it as "two steps back from decentralization." As oracles are not distributed, a single point of failure has been restored. Moreover, their dependability must be trusted because they operate on non-deterministic data, eliminating trustless peer-to-peer contact. Their implementation via smart contracts in the blockchain could also damage users who view the blockchain as more trustworthy than legacy systems. Antonopoulos demonstrated brilliantly that a system based on oracles might fail in two ways. If the oracle is trusted and cannot be compromised, there is still a potential that the data on which it relies has been tampered with; as a result, despite being a trustworthy device, it may feed false information to smart contracts.

Alternatively, if the data are trusted and confirmed, the oracle may fail to operate correctly on the smart contract owing to a malfunction or intentional manipulation. A game-theoretic method demonstrates that the more the value of the smart contract, the greater the motivation to undermine the system. The oracle problem is also generated when real assets are attached to the blockchain via smart contracts. Song explained in a well-known article that in decentralized contexts (e.g., blockchain/smart contracts), tying a physical asset to a digital asset, whether it be fruit, automobiles, or houses, is a crucial issue. Tangible assets are governed by the country where they live, meaning they are subject to (in some cases, predominately) something other than the smart contract. Indeed, this requires faith in something other than the smart contract. If, for instance, a smart contract involves the property transfer of a house between two agents, the code will truly exchange the certificate between the parties.

On the other side, the smart contract may not change what occurs in the real world, as the former owner may refuse to vacate the property. Without the oversight of a third party (such as the government), the enforcement of smart contracts is not guaranteed. The requirement to trust a third party eliminates the "killer feature" of trustless programs, which constitutes a severe drawback of contexts afflicted by corruption. Chainlink exerted tremendous effort to limit the oracle problem. The startup developed a system of reputation-based decentralized oracles to replicate the consensus mechanism of a blockchain. When determining which data to upload to the blockchain, it considers the proportion of oracles with the same data and each oracle’s trustworthiness level. The information validated by most oracles is subsequently uploaded to the blockchain. This robust approach successfully overcomes oracle malfunctions or failures, but service-controlling businesses could still carry out data tampering or collusion. When decentralization is insufficient to solve the oracle problem and data authenticity cannot be objectively validated, a "trust model" is required for the smart contract environment to maintain a certain level of trustworthiness. As described in a recent study, a trust model is an intuitive approach that illustrates why a smart contract application should be trusted. Failure to solve the oracle problem poses a significant threat to blockchain research and application development.

What is Chainlink?

Chainlink is a decentralized oracle network that was first introduced in 2017 and is powered by blockchain technology. Oracles are entities that connect blockchains to external systems, which enables smart contracts to be executed depending on inputs and outputs originating from the blockchain. Oracles can be thought of as "bridges" between the blockchain and the external system.

Chainlink decentralizes the process of moving data on and off blockchains by utilizing "hybrid smart contracts." Traditional oracles are centralized, while Chainlink's smart contracts are hybrid. Chainlink network operators can earn LINK tokens for getting data from off-chain feeds, formatting data into accessible formats, and executing off-chain computations. These actions are rewarded with LINK tokens.

Chainlink's decentralized oracle network comprises nodes required to follow specific protocols. Node operators must stake or lock up a predetermined quantity of their LINK tokens. Node operators’ fees are determined based on the demand for the off-chain resource they offer.

The Chainlink oracle network offers a wide variety of applications because it enables blockchains to communicate with off-chain systems in a manner that is both decentralized and resistant to manipulation. Chainlink has been used for various purposes, including the gamification of personal savings, the facilitation of recalibrations of cryptocurrency token supplies, and the fair distribution of non-fungible tokens (NFTs).

Chainlink was developed by Sergey Nazarov and Steve Ellis, who collaborated with Ari Juels on writing a white paper in 2017. The year 2019 marked the debut of the network. As an ERC-20 token, LINK is compatible with other cryptocurrencies and smart contracts supported by the Ethereum platform. This means that LINK can be exchanged for other cryptocurrencies.

Understanding the Oracle Problem in Blockchain

The term "oracle" originates in Greek mythology and refers to someone who can connect directly with god and predict the future. In ancient legends, decision-makers lacked sufficient information and looked to oracles for wisdom beyond their comprehension. Oracles are technologies that provide blockchain with real-world information in the blockchain ecosystem. An external gateway is required if smart contracts do not include crypto exchange but rather a decentralized mechanism, including weather, stock prices, or political events.

Extrinsic information cannot be transmitted alongside transaction data because other nodes will discover information from an "untrusted" source. Therefore, information from the real world should originate from a third-party, unambiguous source whose trustworthiness cannot be contested by any node: the oracle. Unlike in Greek mythology, oracles on the blockchain recover knowledge from the past rather than predict the future. Oracles are "concepts" and not specific programs or equipment.

Anything that provides external data to the blockchain is considered an oracle. In general, oracles do not directly insert information into the blockchain; instead, they collect and store data from the actual world. When a smart contract using extrinsic data is executed, the code requests the appropriate data from a reliable oracle. Oracles include IoT equipment such as probes and sensors, platforms such as ERP, and, in the case of private data, the very person who operates on the blockchain directly. Oracles serve as a bridge that can convert external, non-deterministic data into a manner a blockchain can comprehend. Oracle-collected data examples include the following:

To better comprehend why oracles are required for smart contracts, revisit the trading example utilizing waves and USD-N stablecoins from the previous paragraph. In this instance, vital information for the smart contract to execute successfully, like the waves/USD-N conversion rate, was lacking (Figure 2). These data are external to the blockchain, and the contract could not be performed without an oracle that updates rates.

Any agent can test whether this (decentralized) oracle's exchange rate is accurate, even if the oracle independently determines the price by simply browsing online exchange rates. Smart contracts behave differently in situations when oracles supply information that is difficult for agents to verify (centralized oracles). In these contexts, the dependability of oracles is crucial. If the contracts involve significant agreements, the oracle's likelihood of being compromised for a specific party's benefit increases considerably. When contract value increases and all parties cannot authenticate the oracle's facts, the oracle itself becomes a "problem."

Solutions To the Oracle Problem

Oracles have enabled and contributed significantly to tokenizing physical assets. However, the oracle problem inhibits their development and applications. Oracles must provide the same assurance of dependability and security as blockchain to overcome this disadvantage. Leveraging decentralized oracles emerges as the consensus solution among blockchain specialists for addressing this challenge.

A decentralized oracle obtains real-world data from off-chain sources of information and transfers it to smart contracts on-chain through a decentralized network of nodes. These decentralized oracles are analogous to public libraries with many information sources. Utilizing several information sources helps to reduce counterparty risk. Moreover, decentralized oracles strive to alleviate concerns regarding dependability and trust by penalizing oracles that supply misleading data for data manipulation.

Consequently, numerous systems are at the forefront of decentralized oracle development. SupraOracles is an example of a cross-chain oracle designed to solve the oracle problem. As a cross-chain oracle, they communicate the same truth across many blockchains. They offer decentralized oracle solutions utilizing consensus-based oracles, decentralized marketplaces, and innovative authentication techniques for oracle data. The significant elements of their product have been fine-tuned to prevent security breaches. They enable you to engage in smart contracts and DeFi transactions without worrying about data stream manipulations.

The Chainlink Solution

Chainlink operates on a paradigm or structure that is quite similar to that of a blockchain. A decentralized network of autonomous oracles) gathers data from diverse sources, combines it, and offers a validated, single data point to the smart contract to accelerate its execution, eliminating any single failure point.

Chainlink, for example, supplies the USD cost of Ethereum's native cryptocurrency, ETH, to blockchains through the ETH/USD Price Feed, which sources and sends price data through a network of independent oracle nodes and data sources. A blockchain application can then use the oracle of ETH/USD pricing to determine the present worth of ETH when it is used as collateral for a loan or to settle a forecast about the future value of ETH.

Furthermore, Chainlink includes numerous layers of security in addition to decentralization to ensure that consumers can trust the Oracle network. Chainlink is a versatile framework for constructing and operating Oracle networks, allowing users to create and connect to customized Oracle networks independent of other Oracle networks.

We Can Help You Leverage Chainlink in Various Blockchain Solutions

Leverage our Chainlink development services and utilize Chainlink to handle the relationship between your smart contract and third-party, real-world applications on the various blockchain network.

Using our Chainlink blockchain development services, we can assist you in resolving blockchain oracle difficulties that have arisen inside your blockchain ecosystem or establish connections between smart contracts and APIs offered by third parties. Please make contact with our staff and get the ball rolling.

Conclusion

Too frequently, "blockchain" and "bitcoin" are used interchangeably. Most articles discuss properties exclusive to Bitcoin rather than those familiar to blockchains. In addition, the literature ignores that oracles are required to operate smart contracts in the real world. In this work, we study the functions that oracles play in applications that take place in the real world. Oracles are the only way for blockchain to communicate with the physical world, yet, unlike blockchain nodes, they are centralized and susceptible to tampering and manipulation.

Oracles are the only way for blockchain to communicate with the physical world. The "oracle problem" refers to the possibility that trusted oracles could be hacked, disseminating inaccurate data over a blockchain. The oracle problem introduces a degree of error into any application in the real world, although the degree of that error varies depending on the application. This article examines some of the most promising and widely debated uses of smart contracts, including intellectual property rights protection, energy generation, healthcare, supply chain management, academic transcripts, and legal contracts.

The findings of this study's analysis provide credence to the idea that the oracle problem will inevitably impact applications that are used in the real world. However, the impact is distinct, and it is determined entirely by the reliability of the system in which it is implemented. The academic sector is one in which the oracle problem poses the lowest threat, as postulated by Antonopoulos and Woods [18]. This is despite the educational sector being less decentralized than other sectors. On the other hand, the oracle problem is a legitimate concern in the energy industry. It features a dual instance of the issue and a decentralized command and control structure for its production.

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