Cointime

Download App
iOS & Android

Oracles: A Blockchain Tool Of Connect

Validated Project

Bitcoin popularized the decentralization paradigm with the concept of programmable money. The bitcoin (cryptocurrency) transfers are transparent and occur in a peer-to-peer fashion without requiring any intermediaries. Further, Vitalik explored the technology behind- blockchain and unleashed its true potential by showing how programmability can be incorporated into it using smart contracts. A technology once considered a digital currency is now researched worldwide, and many potential use cases related to various domains not confined to the financial sector, have been developed.

Smart contracts were the ones which helped widen the application domain. But smart contracts have severe challenges and boundaries, unlike other programming languages.

How does blockchain work?

A blockchain network is a decentralized network of participants. Each participant will have an immutable ledger for recording the transactions. Every transaction within the ecosystem will be received and verified by all the participants in that system. The blockchain will have a well-defined consensus mechanism- a rule for deciding which transactions should be recorded in the ledger. Based on the consensus, verified transactions are added to the ledger. The essence of decentralization lies in the consensus mechanism, which ensures an unbiased decision verifying the transaction and ledger updates.

There comes our first challenge. A blockchain can verify the transactions only if it has the background data for verification. For example, if a cryptocurrency transaction needs to be verified, it should have the earlier balance of the sender and recipient of that transaction. This is possible in the case of token transfers since all the transfers occur only via blockchain, and smart contracts can access these. But what about the transactions in a supply chain? How will blockchain verify a transaction that needs to record a fact like“ Vehicle A has reached the location ABC with X kg of mangoes”?

Blockchain creates a restricted system environment which is separated from the real world. Smart contracts are programs running on a blockchain which can only passively receive the data into the chain but cannot actively obtain the data out of the chain. A large number of blockchain use cases are based on retrieving and storing real-time data: like location, temperature, price, quantity, quality etc. For this, we need specific services which can feed real-time data onto the smart contracts. They are termed Oracles.

Oracle

Wikipedia defines an oracle as a person or thing that provides wise and insightful counsel or prophetic predictions. The word is believed to be related to Greek culture, referring to divine revelations given by priests or equivalent persons as a response to an inquiry.

A blockchain oracle is defined as an external data agent that observes real-world events and reports them back to the blockchain to be used by smart contracts[3]. Oracle comprises an entire system that collects off-chain data, verifies it and transmits it to smart contracts on the blockchain. An oracle may consist of three elements, as shown in below figure.

The data source can be a sensor (measuring temperature, humidity etc.), a Web Application Programming Interface (which provides access to data recorded in other off-chain applications like stock markets, crypto-exchanges), manual data entry, etc. They are considered trusted data sources. The oracle nodes (service) collect data from the data source, certify accuracy, and convey reliable data to the smart contract. It can be a node, a group of nodes or any trusted environment. A smart contract in the blockchain will have a code that governs the processing based on input data.

These three parts may not exist separately from each other. Oracles are classified based on these entities’ organizations and their tasks.

Types of Oracles

Oracles are classified based on various properties[3].

  1. Data Source: Depending on the external data source, oracles can be classified into hardware, software, and human. Hardware oracles use specific devices like sensors and scanners to gather data. Software oracles use programmed interfaces to collect data like schedules, price data and exchange rates. Human oracles refer to the manual entry of data.
  2. Trust Model: The number of nodes in the oracle network defines the trust model of an oracle. A centralized oracle may be depending on a single source, whereas a decentralized oracle gathers data from multiple sources and reaches a decision based on a consensus mechanism. Provable and Town crier are centralized oracles. Chainlink is a decentralized oracle which acquired Town Crier.
  3. Design Pattern: Oracles can be designed in a request-reply setup, where the smart contract initiates a request serviced by an off-chain element. In a publish-subscribe design pattern, an oracle keeps track of fluctuating data like market prices, temperature etc. Updated data will be broadcasted to its subscribers. The immediate-read pattern is helpful in quick response scenarios like academic certificates or dial codes.
  4. Interactions with external data sources: Interactions can be classified as inbound or outbound. Inbound oracles feed data from external sources to the blockchain (eg reading input data from a sensor and storing it in the blockchain). In contrast, outbound oracles allow smart contracts to deliver data to the external world (eg sending a notification once a blockchain payment is received).

The Oracle Problem

As mentioned before, the consensus mechanism is responsible for the trustless data on the blockchain, which confirms their reliability. At the same time, Oracles skip the consensus mechanism and provide external data to the blockchain without any standard verification. This license gives oracles the privilege to insert arbitrary data on the blockchain.

Since oracles operate separately from the blockchain, they do not guarantee the decentralization, immutability and transparency of the blockchain environment. If any trusted third party is providing the oracle service, it raises some serious questions like

  • Can that third party be trusted?
  • What if the data provided is incorrect?
  • What if the data was recorded correctly but edited by attackers?
  • Won’t that be a single point of failure?

The Oracle problem puts forward these concerns that question the inclusion of oracles which make blockchain adoption risky for specific real-world scenarios. Thus the centralization of oracles raises the Oracle Problem which brings the puzzle between efficiency and decentralization when oracles fetch real-world events data from external data sources [3].

So if a smart contract-based application uses oracles to access external data, proper audit measures should be incorporated to ensure security. If the external data source is not trustworthy, it will affect the credibility of the entire smart contract, which works based on that data and even questions the role of blockchain.

References

[1] Lin, SY., Zhang, L., Li, J. et al. A survey of application research based on blockchain smart contracts. Wireless Netw 28, 635–690 (2022). https://doi.org/10.1007/s11276-021-02874-x

[2] Caldarelli, G. Overview of Blockchain Oracle Research. Future Internet 2022, 14, 175. https://doi.org/10.3390/fi14060175.

[3]H. Al-Breiki, M. H. U. Rehman, K. Salah and D. Svetinovic, “Trustworthy Blockchain Oracles: Review, Comparison, and Open Research Challenges,” in IEEE Access, vol. 8, pp. 85675–85685, 2020, doi:10.1109/ACCESS.2020.2992698.

[4]https://ethereum.org/en/developers/docs/oracles/

Image Courtesy: Flaticon

(By Sumi Maria Abraham, Research and Development Engineer, Kerala Blockchain Academy)

Comments

All Comments

Recommended for you

  • Indonesia's Financial Services Authority to Regulate Crypto Industry in 2025 with Evaluation in Regulatory Sandbox

    Indonesia's Financial Services Authority (OJK) will take over regulation of the crypto industry from the commodities agency Bappebti. Crypto firms must undergo evaluation in a regulatory sandbox before being licensed to operate in the country. The OJK aims to prioritize consumer protection and education, and firms operating without evaluation in the sandbox will be considered illegal. The sandbox provides a safe and isolated environment for testing and innovation development, helping to enhance security and responsible management in the financial sector. Once under OJK's oversight, crypto assets will likely be reclassified as financial instruments.

  • The Shenzhen Illegal Fund Raising Prevention Office issued a risk warning on the "DDO digital options" business

    The Shenzhen Office for Preventing and Dealing with Illegal Fundraising issued a risk warning regarding the "DDO digital option" business. The activities related to the DDO digital option business conducted in the name of Dingyifeng International are essentially the issuance and trading of virtual currencies. According to the "Notice on Further Preventing and Dealing with Risks of Speculation in Virtual Currency Trading" jointly issued by ten departments including the People's Bank of China in September 2021, it is clear that virtual currency-related business activities are illegal financial activities, and overseas virtual currency exchanges providing services to residents within China are also illegal financial activities. The activities conducted by Dingyifeng International in the name of serving residents within China are suspected of illegal fundraising and other illegal financial activities. Our office has organized relevant departments to carry out work, resolutely deal with illegal fundraising and criminal activities, and seriously investigate the legal responsibilities of relevant personnel. (Shenzhen Local Financial Supervision and Administration Bureau)

  • The Hong Kong Legislative Council plans to review the relevant stable currency consultation and sandbox legislation at the end of this year or next year

    Hong Kong legislator Wu Jiezhuang revealed that Hong Kong will release stablecoin consultation and sandbox (computer security mechanism), which will allow the industry to innovate digital asset projects in the sandbox environment. Relevant legislation will be reviewed in the Legislative Council at the end of this year or next year, which will help the entire digital asset industry ecosystem. Hong Kong has been improving the digital asset (virtual asset) market on different legal levels. Last year, there were regulations on virtual currency trading platforms and issuance systems.

  • Vitalik: Humanity needs to create a world where blockchain and artificial intelligence work together

    Vitalik Buterin, the founder of Ethereum, stated at BiddleAsia 2024 held at Signiel Seoul in the Songpa district on March 28 that artificial intelligence is a huge market and its importance is increasing day by day. We need to create a world where blockchain and artificial intelligence work together. Artificial intelligence can now create applications with 100 to 500 lines of code. Vitalik also stated that the ability to write 10,000 lines of code can eliminate most of the bugs in the Ethereum virtual machine.

  • South Korean RWA blockchain technology development company PARAMETA completed a new round of financing of approximately US$7.5 million

    South Korean RWA blockchain technology development company PARAMETA announced the completion of a new round of financing of KRW 9 billion (approximately $7.5 million), with Shinhan Hyperconnect Investment Fund under Shinhan Venture Investment and Korea Asset Investment & Securities participating. As of now, the company's total financing has reached KRW 25 billion (approximately $20.8 million). PARAMETA plans to use this investment to expand its own blockchain technology research and development capabilities to meet RWA technology needs and expand from core technologies such as engines/chains to service applications. Relevant services are expected to be launched within the year.

  • Incheon, South Korea launches blockchain hub city

    South Korea announced on the 28th that it will establish a blockchain technology innovation support center in the Songdo Michu Building in the second half of this year. Incheon was finally selected as a participant in the "2024 Regional Blockchain Technology Innovation Support Center Construction Project" jointly organized by the Korean Ministry of Science, ICT and Future Planning and the Korea Internet & Security Agency (KISA). Incheon is the third region to be selected after Busan and Daegu. In February last year, Incheon established a dedicated blockchain department and formulated a four-year plan to create a blockchain center city, which was promised by Incheon Mayor Liu Zhengfu. After being selected, Incheon will receive KRW 1.8 billion in government funding.

  • BTC breaks through $70,000

    The market shows that BTC has broken through $70,000 and is now reporting at $70,003.6. The intraday decline has reached 0.58%, and the market fluctuation is large. Please be prepared for risk control.

  • Base TVL exceeded US$3 billion, with an increase of 71.79% in the past 7 days

    According to the latest data from L2beat, supported by cryptocurrency exchange Coinbase, the total locked value (TVL) on the Base chain, a layer 2 solution for Ethereum, has surpassed $3 billion. At the time of writing, it has dropped to $2.99 billion, with a 7-day increase of 71.79%, reaching a new historical high.

  • Ethereum liquidity re-pledge agreement TVL exceeds US$7.4 billion, continuing to hit new highs

    According to DeFiLlama data, the total value locked (TVL) in Ethereum's liquidity re-staking protocol has reached a new high of $7.406 billion. The top five protocols ranked by TVL are:

  • Web3 gaming platform Elixir Games completes $14 million in seed round financing

    Web3 gaming platform Elixir Games has received a $14 million investment in its seed round of funding, with investors including gaming giant Square Enix, Shima Capital, and the Solana Foundation. This funding round will bring Elixir Games' total funding to $20 million. The company plans to use this funding to develop its gaming ecosystem, with plans to launch in the second quarter of 2024 and support the launch of its ELIX token in its gaming products.