Abstract
Blockchain networks often require data to and from the outside world, especially when offering services such as in the financial domain. Blockchain oracles are critical infrastructure layers that bridge the blockchain network so that smart contracts get rich data to process transactions or execute business logic. Blockchain oracles are classified into various types depending on the data facility offered. Some popular oracle networks include chainlink, brand protocol, and provable. This chapter explains how oracles work, such as fetching and delivering data, data verification and aggregation, and reward mechanisms. It also briefly discusses on their applications, such as price feeds for DeFi applications, event triggers used in insurance and gambling contracts, identity/reputation management for NFTs, and aggregating of IoT sensor data. Security and decentralization are discussed. The chapter ends with a discussion of future research trends and the integration of artificial intelligence and machine learning, event-driven architectures, and recent advancements.
TopWhat Are Oracles?
The burgeoning blockchain landscape has witnessed a proliferation of heterogeneous blockchain platforms, each with a unique architecture and protocol. Unfortunately, these platforms remain mostly isolated, hindering seamless communication and interoperability. Two popular approaches currently famous for this are – the relay approach and the oracle approach.
An “Oracle”, according to Greek mythology, is a person who can communicate with God. Because ordinary people sometimes cannot make decisions independently, they used to turn to oracles to help communicate with God and get insights. In blockchain, “Oracles” are considered infrastructure tools and layers through which off-chain data is accessed, sourced, and verified for use by the blockchain. They are essential in blockchains such as Decentralized Finance (DeFi) because of the necessary interactions with the real world when offering financial services. No wonder they are called the 'invisible backbone' of DeFi and blockchain-based applications (Wintermeyer, 2021). Oracles are conceptual solutions offered as services. However, they are not explicit programs, codes, or data sources. They use trusted third parties that collect data from data sources, verify it, and then transmit it to the blockchain so that the smart contracts get exogenous data (data/information from the outside world) (Hassan et al., 2023). Because oracles are centralized, the dependency of blockchain on them could pose problems because they bring back the concepts of centralization and trust them back to blockchains.
Definition and Purpose of Oracles
Oracles are intermediaries that facilitate communication between a distributed application (dApps) and some external real-world data sources. They serve as trusted third-party entities that verify and validate external data, ensuring its accuracy and authenticity. Applications can get rich real-world data such as price feeds (as in stock markets or for an online store), weather updates, or event notifications (such as from an IoT sensor or a CCTV camera). dApps and blockchain networks need external data to enhance the functionality and decision-making processes as per the business logic.
There are five main advantages of using blockchain oracles:
- 1.
Decentralized Data Access: Blockchain oracles will make secure and reliable external data, resources, and events available. With this, dApps can make more informed decisions and improve their functionality.
- 2.
Increased Trust and Security: Oracles ensure the accuracy and authenticity of data by validating and verifying external information. Reduced risk of fraud and manipulation will hence become possible. Also, the blockchain nodes will be de-stressed because of the shift in part of their processing load.
- 3.
Interoperability: Interaction with external systems and networks will be possible through blockchain oracle-enabled dApps. This promotes interoperability and collaboration between various elements and stacks of the blockchain ecosystems. This became even more important because typical blockchain systems have several fragmented and heterogeneous blockchain platforms. Blockchains implement interoperability using Naive relay and Oracle solutions (Sober et al., 2021).
- 4.
Feeding off-chain data to smart contracts: The Oracle Problem is an open practical problem involving off-chain data to and from blockchains and their smart contracts. According to the oracle problem, or oracle paradox, as it is referred to in some literature, the dilemma lies in the fact that the reliability of blockchain data is threatened and compromised when data/information is introduced from the outside world. The paradox is believed to be a prime reason some businesses hesitate about smart contracts. Some mitigation strategies were proposed to counter this (Albizri & Appelbaum, 2021). “Trust, but Verify” and “from trust to truth” (Hassan et al., 2023) remain famous mantras. One example of this happens is when oracles are used to observe occurrences and provide this information to smart contracts. Researchers insist that oracles should be viewed as service organizations under the auditing standards of the AICPA and PCAOB (Sheldon, 2021).
- 5.
Event-Driven Functionality: Oracles can trigger events and actions within dApps, enabling them to respond to changes in the external environment and improve their responsiveness.
Key Terms in this Chapter
Chainlink: Chainlink is an oracle network that aggregates off-chain data and securely provides it to smart contracts on blockchains. By connecting smart contracts to existing APIs and data sources, Chainlink allows decentralized applications to access key functionalities.
IoT Sensor: IoT (Internet of Things) sensors are hardware devices that detect real-world conditions like temperature, motion, pressure etc and relay this digital sensor data to other electronic devices and systems. They are an important source of off-chain data for blockchain oracles.
Data Aggregators: Data aggregators collect data from multiple sources, websites, APIs etc and make it available through a unified interface. In blockchain oracles, data aggregators consolidate off-chain data for smart contracts from various endpoints in a decentralized network.
Proof of Stake: In Proof of Stake (PoS) protocols, the creator of the next block is chosen in a pseudorandom way, depending on how many coins they hold. This favors those with more existing wealth holding stakes in the currency. The validation process is faster with less resource intensive than Proof of Work.
Proof of Work: Proof of Work (PoW) is the original consensus algorithm where participants validate transactions by competing to solve complex cryptographic puzzles in a process called mining. The first to solve the puzzle and add the block to the chain is rewarded with coins. This process requires immense computing power.
Blockchain Node: A blockchain node is a computer/device that stores, validates and helps propagate transactions on a blockchain network like Ethereum. Full nodes run the blockchain client software and have a full copy of the blockchain data.
Consensus Mechanisms: Consensus mechanisms ensure all nodes reach an agreement about the validity and order of transactions/blocks added to a blockchain. The two main types are Proof of Work and Proof of Stake which use different algorithms to achieve distributed consensus.
Decentralized Oracle Networks: A Decentralized oracle network crowdsources data from several independent oracle nodes/providers to reduce centralization risks. It uses economic incentives, redundancies and other techniques to deliver more accurate and secure data to blockchain applications.
Blockchain Oracle: An oracle provides real-world data like price feeds, location coordinates etc to smart contracts on blockchains which otherwise have no way to access off-chain data. It acts as a bridge between blockchains and external data sources and APIs.