Smart contracts are termed ‘“smart’” for a reason. They are cost-effective, secure, accurate, autonomous and can make a world of a difference to the world we live in. Well, provided they are successfully implemented in the economy. One of the greater stumbling blocks preventing smart contracts from unlocking its true potential is that when each instance of smart contract running on different nodes tries to obtain external data outside the blockchain, they will eventually receive inconsistent information due to the difference of their network efficiency and location. The inconsistency will revert the smart contract. Hence, the need for oracles is born.
What Are Oracles?
First, let’s hold our horses, and recap how a smart contract works. Generally speaking, a smart contract is an automated working program that activates when certain conditions are achieved. A smart contract lays out the terms of a contract that both parties agree to. These terms are pre-determined and are immutable once coded into the system. For instance, a mining firm can upload their right of asset ownership onto the blockchain for subsequent investors to purchase. Each step of the process is documented on the blockchain and is fully transparent to both parties. However, once the smart contract is deployed and takes effect, no changes to the contract can be made.
While the above sounds ideal for the integrity of the transaction, real life is unfortunately not that simple. Extenuating circumstances may arise, and the terms as previously outlined in the smart contract may not be as concise and clear as before. Alternatively, it could also be that the terms of the contract require real-world information to determine if execution is required. For instance, if person A and person B were to bet on the price of BTC on 1 January 2020 at 17:00 (GMT+8), the price of BTC at that stipulated time would be required to determine the victor, especially since smart contracts once executed is irreversible.
This inevitable need for real-world information beyond what a smart contract can obtain gives rise to the need for oracles. As defined by Blockchain Hub, oracles are agents that “find and verify real-world occurrences and submit this information to a blockchain to be used by smart contracts”.
So How Do They Work?
Oracles are pools of reliable data gleaned from the offchain world that are supplied to smart contracts present in the blockchain. A simple illustration of how the transaction goes can be seen below:
Simply put, these oracles become a middle-men of some sorts, transmuting information between the smart contracts of the virtual world and information sources in the real world. Furthermore, not only are they information platforms that provide external data for blockchains, they can also function as a balancing mechanism to spread out benefit across the chain in instances of Proof of Work [PoW] and Proof of Stake [PoS] schemes.
Proof of Work (PoW): If a user with malicious intent inputs a false data into the given node, the oracle can reject the overall result of node accounting to prevent false values from occurring.
Proof of Stake (PoS): The PoS scheme contains a vulnerability that allows the rich to gain more rights through an accumulation of resources. In this case, the oracle can cap the resources available and prevent the rich from entering and exploiting the system, thereby maintaining system stability.
Conclusion?
Oracles are key in determining the success of smart contracts and the permissionless blockchain they are on (i.e. Ethereum, Konrad). They provide information that smart contracts require from the real world in order to execute the deterministic transactions (i.e. transactions which can be verified by all nodes) coded in their system. Furthermore, they function as balancing mechanisms within the blockchain to prevent exploitation and ensure benefits for all.
In this article, we have given you a general overview of oracles and their integral role in the execution of smart contracts but we have yet to explore a real-case application of oracles and its various types. Interested to find out more? Stay tuned to Part 2 of this article where we delve into the different types of oracles available, and how some like Konrad have sought to use it to its best potential.
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