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Yash Chaudhary
Apr 2, 2022
by Yash Chaudhary

Oracles - A Bridge Between Real World and Blockchains

Oracles

Table of contents

  1. Problems with Oracles
  2. Two types of Oracles
    1. Centralized Oracles
    2. Decentralized Oracles
  3. Most Used Oracles in web3
    1. Chainlink
    2. Band Protocols
    3. Pyth Network
  4. Conclusion
Oracles feed data from the outside world to a blockchain like Ethereum, such as the market price of cryptocurrencies or results of elections. The data can then be used by a smart contract on the blockchain to make decisions, such as whether or not to distribute money and to whom.

Here is an example in more detail:

Farmers frequently buy agricultural derivatives as insurance if their crops are destroyed by drought. If the weather doesn't cooperate for the farmer one season, the derivative will compensate them with a lump sum payment. Oracles such as Chainlink and Band control the majority of Oracle's market.

Problems with Oracles

The ability to run smart contracts is a defining feature of a blockchain like Ethereum. The smart contract is managed by the blockchain after it has been designed; no entity needs to be trusted to implement the rules. No intermediary can prevent the transaction from occurring as long as the smart contract's criteria are met. The contract merely executes the instructions given to it.

On the other hand, Oracle is a data stream managed by an entity. For Example, a weather oracle. Although blockchains like Ethereum were designed to exclude third parties. Putting your faith in a data source can lead to problems. For Example, the owner of an oracle's data stream could upload incorrect data to sway smart contracts in their favour.

Someone might even hijack the data flow to skew the results in their favour. This isn't an issue for smart contracts that aren't reliant on oracles.

Researchers are looking into different ways to mitigate this problem, such as creating oracles that are more decentralized or otherwise safeguarded from malicious actors. Oracle computers using Trusted Execution Environments (TEEs), unique hardware portions with added security, making them harder to tamper with, is one such area of research.

Two types of Oracles

Centralized Oracles

A single entity controls centralized oracles, which serve as the sole data source for smart contracts. They demand that smart contract participants place a high level of faith in a single organization. They also constitute a single point of failure, which might jeopardize a smart contract's security. If an oracle is compromised, the smart contract is as well. Smart contracts' accuracy and usefulness are strongly reliant on the quality of data they are given. Therefore oracles retain a significant level of control over them.

Smart contracts were created to prevent counterparty risk and excessive reliance on third parties. Oracles allow contracts between untrustworthy parties to execute, but they risk becoming the middlemen they were supposed to replace (especially if they become over-centralized). The protection of privacy, security, and fairness and avoiding over-centralization, which could harm the interaction between smart contracts and blockchains, is referred to as the oracle problem.

Decentralized Oracles

Decentralized oracles strive for trustlessness and deterministic outcomes based on cause and effect rather than individual relationships. They try to achieve these goals in the same way a blockchain network does: by distributing trust across many network participants. Decentralized oracle networks can strengthen the security and fairness of smart contracts by using several data sources and constructing an oracle system that a single party doesn't control.

Similarly to any other third party, centralized oracles can become compromised and susceptible to manipulation. As a result, many blockchain projects are building (or have established) decentralized oracles, including Chainlink (LINK), Band Protocol (BAND), Augur (REP), and MakerDAO (makers of DAI). Decentralized oracles' ability to address the oracle problem and dramatically increase the use cases of smart contracts across a wide range of markets is an exciting and ongoing development for cryptocurrencies and the blockchain industry.

Most Used Oracles in web3

Chainlink

The most widely utilized oracle network for connecting blockchain networks and smart contracts to real-world data resources is Chainlink. The network's native token, LINK, is used to pay for usage. It uses a single framework to connect all major private and public blockchains and allow cross-network communication.

Advantages of Chainlink

  • It's a decentralized oracle with a large capacity for extension. The protocol's extensible foundation allows it to offer information on nearly anything.

  • The system is decentralized, and it was designed with security and the accuracy of the data being provided in mind.

  • The installation of Chainlink nodes is straightforward, allowing for the rapid expansion of the network's node network.

  • The protocol's economic architecture allows anyone with a node in the network to make a good amount of profits by selling services to others who utilize the protocol.

  • The system is open-source software that can be verified in any configuration.

    • Band Protocols

    Band Protocol is a cross-chain data oracle platform that aggregates and integrates real-world data and APIs to smart contracts in a decentralized manner. The protocol uses BandChain, an independent blockchain created exclusively for oracle computations such as settlement, data sourcing, and aggregation that is protected via delegated proof-of-stake.

    • Economic incentive: BandChain nodes that operate independently have to stake BAND and reputation to maintain data integrity.

    • Scalability: All oracle computations are performed on BandChain, with a block time of 2 seconds. The speed and congestion of any native blockchain hosting dApps, such as the Ethereum network do not stifle band oracles. This enables Band oracles to quickly answer all data queries from numerous blockchains that are unrelated to one another.

    • Real-Time Data Query: Smart contracts can use Band Protocol to query data on-demand and obtain a real-time response that can be validated on destination blockchains in as little as 4-6 seconds.

    • Flexibility: On BandChain, you may create fully configurable Oracle scripts that link to whatever data sources or APIs you choose, with custom aggregation methods and security parameters.

    • Real-time Payments: Instead of a high fixed fee to update reference data, data requests on Band Protocol can be paid in real-time.

      • Pyth Network

      The Pyth network is a next-generation oracle that intends to make crucial financial market data available to the entire public. The network accomplishes this by incentivizing market players such as trading firms, market makers, and exchanges to share pricing data obtained as part of their current activities directly on-chain. The network then collects this first-party price data (while remaining on-chain) and makes it available to on-chain and off-chain applications.

      Pyth Network has four on-chain core mechanisms:

      • Price aggregation combines individual publishers' reported prices and confidence intervals into a single price and confidence interval feed for a certain product (for Example, a BTC/USD feed). This approach is intended to provide stable price feeds – feeds whose prices are not changed considerably by small groups of publishers.

      • Data staking allows delegators to earn data fees by staking tokens. The delegators determine the aggregate influence (stake-weight) of each publisher on the aggregate price. This method also affects whether or not delegators' stakes are reduced. Finally, the system collects consumer data fees and sends a portion to delegators (initially set at 80 percent ). The remaining 20% goes into a prize pool, which is then distributed among publishers.

      • Each publisher's part of the reward pool is determined by reward distribution. Delegators can invest in a reward pool for each product. The reward distribution algorithm preferentially rewards publishers with higher quality price feeds, lowering the chances of uneducated publishers receiving rewards.

      • A coin-voting method will be used in governance to establish the high-level parameters of the three mechanisms mentioned above. The number of PYTH tokens that publishers must stake to enable claims to be filed against a product, the types of tokens that can be used for data fees, the products that are listed on Pyth, the share of data fees allocated to publishers, delegators, and other uses, and more are among the parameters.

        • Conclusion

        Oracles are now the most essential part of Web 3 infrastructure. They enable various applications on blockchain networks to work correctly. Compromise in the security of Oracles can cause a loss of billions of dollars in cryptocurrency markets. Currently, Chainlink is the market leader and has secured more than 75 billion dollars worth of assets. 

        Fast access of real-world data to smart contracts and blockchain networks while maintaining high security and decentralization. In the coming years, Oracle performing best in all of these parameters will lead to the oracle space.

         

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        Blockchain Ethereum Smart Contracts Chainlink DeFi LINK Oracle Oracles Bitcoin Solana BAND Pyth Network
        Oracles - A Bridge Between Real World and Blockchains
        Yash Chaudhary
        Yash completed his graduation in b.tech (Computer Science ). Yash is passionate about applications of blockchain technology. Yash believes use of blockchain technology can transform our lives at a large scale. Yash daily reads articles, research reports and also documentation of different protocols. Yash listen to podcasts to know the view of industry experts.

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