From Delphi to Data: Why We Evolved Oracles on the DAPP Network
From prediction markets to peer-to-peer insurance and financial contracts, dApps can now source data in a trustless manner.
There were few figures in the ancient world that enjoyed the esteem bestowed upon the Oracle of Delphi. Serving as the mouthpiece of the god Apollo Pythia, the infallible Delphic Oracle, was lavished with gifts and sacrifices from royalty and the wealthy elite alike. From the prophetic proclamations issued by the high priestess of the Temple of Apollo to today’s multi-billion data-as-a-service market, humans have always placed a premium on sourcing high-quality information.
Blockchains have been hugely successful at creating closed digital universes in which all participants share a single source of truth. However, external sources of information from both the wider internet and the real-world are crucial to fully unleashing the potential of smart contract-based applications. Exchange rate information, weather forecasts and the outcome of an election are just a few examples of data sets that need to be accessed and manipulated from within a contract. Just as the prophetic predictions of the Delphic Oracle were a critical component of a well-functioning ancient society, web oracles could upgrade the capabilities of blockchain networks by exposing smart contracts to trustworthy sources of external data.
Oracles — Because Smart Contracts Are Too Confined
Smart contracts are self-enforcing digital agreements that execute once certain conditions have been met. Conditions could include events native to the blockchain — such as Alice depositing tokens into Bob’s wallet — or external factors like the score of a basketball game, the USD/EUR exchange rate or the weather in Colorado. While on-chain data is deterministic and can be sourced directly from the chain history, accessing credible external data feeds remains a challenge.
“The Oracle Problem” refers to the difficulty of sourcing credible external data for use from within a smart contract. Relying on a single, central source for the information is undesirable, particularly when significant sums of money are at stake or when the truth of a matter includes an element of subjectivity. For example, the BTC/USD spot rate is dependent upon the exchange from which the data was pulled.
Trustworthiness is not the sole concern when accessing information from centralized entities for blockchain use. Hackers could compromise the integrity of the data source and cause significant material damage. In 2013, a tweet sent out by attackers who had managed to infiltrate the Associated Press’s account alleging that President Obama was injured in an explosion caused the stock market to momentarily shed $130 billion.
Oracle Use Cases on the Blockchain
Access to credible data sources from the outside world significantly expands the scope of smart contract-powered applications.
Trading Algorithms and Derivatives
Decentralized trading algorithms that leverage the wisdom of the crowds, such as those pioneered by Numerai, can only hope to return alpha if the quality of data fed into their prediction engines is guaranteed. Derivative contracts whose pricing depends on the movement of underlying assets depend on a trustworthy price feed. In addition to porting traditional options and futures on-chain, blockchain technology extends the scope of derivatives by enabling crypto-native derivative assets to emerge.
One such example is the popular sector of stabletokens. While a slew of tokens pegged to the value of the US dollar has been introduced into the markets, stable tokens could peg their value to any other fiat currencies, commodities or real-world assets. A Tesla-pegged token would need a real-time price feed in order to adjust its price accordingly.
On March 28 2018, 2.38 million people enjoyed a game of HQ Trivia, illustrating the global appeal of mobile trivia applications. A peer-to-peer version would allow trivia games to spring up spontaneously across a global network, instead of the game creators having sole control of declaring the start of a game. Trivia apps on the blockchain would require the answers to originate from a decentralized source so as not to compromise their trustless nature. Data points, such as the capital of South Dakota or the average lifespan of an opossum, could be fetched by web oracles and rendered from within these applications with the same ease as visiting a Wikipedia page.
At the heart of the Great Recession stood the insurance companies, whose opaque pricing and accounting practices piled additional risk on an already-shaky system. These institutions were deemed “too big to fail” and received enormous bailouts despite holding toxic assets on their balance sheet.
A peer-to-peer insurance platform housed on the blockchain would enable insured parties to verify reserve ratios and hold their platform of choice accountable. However, these applications would require a trustworthy source of event data in order to trigger a claim action and pay out the insured party. Decentralized flood insurance providers, for example, would need accurate meteorological and nautical information in order to determine if, in fact, there was a flood severe enough to warrant a claim.
Will Donald Trump win the Nobel Prize during his first term in office? Will the movie Toy Story 4 gross over $275 million on its opening weekend in theaters across the US? Punters on prediction markets such as Augur have already begun betting on these and other markets. Determining the outcome of the first bet is simple: Trump either wins the Nobel prize or he doesn’t. Answering the second question gets a little more complex, since multiple sources may have varying numbers regarding Toy Story’s opening weekend at the box office. Aggregating the data in a trustworthy manner is essential to the smooth functioning of the prediction market.
Logistics managers can ensure that supplies are procured on time and within budget by tracking the movement of goods on a blockchain-based supply chain management tool. Reliably collecting the location information of each parcel is crucial to maintaining the integrity of the supply chain.
Power to the Blockchains
Knowledge, as we know, is power. Ancient cultures understood this and accorded the highest honor to the purveyors of prophetic information. Blockchain engineers also comprehend the strength of high-quality data sources, adding the stipulation that these sources should not compromise the trustlessness of smart contracts.
From amusing applications such as prediction markets to the more serious business of peer-to-peer insurance and financial contracts, delivering information with a high degree of integrity about events occurring in the outside world is crucial to expanding the capabilities of dApps on the blockchain. DAPP Service Providers (DSPs) could carry the mantle of Delphi into the 4th Industrial Revolution by supplying developers with trustworthy data feeds to power their applications.
Read more about the DAPP Network’s Oracle service here.