Demystifying Blockchain Oracles: Part 1

blockchain oracle

Simply put, blockchain oracles facilitate the access, processing and transfer of information between the outside world of off-chain data and smart contracts. That said, DeFi and applied blockchain apps would not be possible without them.

The data they transmit can take various forms as they enable communication with various off-chain systems, including web APIs, cloud providers, e-signatures, payment systems, IoT devices, and other blockchains.

That said, it is valuable to understand their potential when it comes to increasing the utility of blockchain, which are the most exciting developments aimed at reducing the trust placed in any of the current oracle solutions, and what role these arbiters of truth play in the future of decentralized services.

To answer these questions, CryptoSlate spoke with a number of leading experts in the field, some of whom will meet in Berlin in June at the world’s first technologically agnostic meeting that is completely focused on oracles.

Connecting smart contracts to information outside their own blockchains

While they are already a critical part of the infrastructure that enables DeFi – ensuring the validity of data in the blockchain ecosystems – oracles are likely to become more prominent as more use cases move to Web3.

“As we looked at a lot of the use cases, we realized that we really had to create the information — we had to answer questions that you can ask in human language,” explains Edmund Edgar, founder of Social Minds Inc., who created ‘ the world’s first smart contract oracle called Reality Keys.

Reality Keys was designed in 2013 for Bitcoin scripting and was not widely used, but it served as the basis for the development of Reality.eth – an open source arbitration platform on Ethereum.

“Reality.eth is built to answer any question you like, and instead of relying on a single entity, it’s crowdsourced,” noted Edgar, explaining how multiple people can answer the question, and the system with bonds is included in the design to encourage them to answer honestly.

While calling the integration with Gnosis Safe, Edgar noted that Reality.eth is increasingly being used for governance.

Originally a multisig wallet, Gnosis Safe evolved into an operating system for decentralized autonomous organizations (DAOs).

The SafeSnap module, an oracle-based solution leveraging Reality.eth, makes it possible decentralized implementation of governance proposals through an on-chain implementation of off-chain voting.

How SafeSnap works (Source: Gnosis)

“You vote token holders using a system called Snapshot, and then you use Reality.eth to find out what the vote was and pass that information to the smart contract so it can act on it,” explains Edgar . the role of oracle in the decentralized management tool suite.

Minimize reliance on trusted parties

At present, there are different types of blockchain oracle services. The most basic typology distinguishes between first-party and third-party oracles. While first-party oracles are managed by the API providers themselves, the latter are not managed by the owners of the information they serve, but act as an intermediary between the data source and the blockchain.

“Some Oracle services are centralized, while others are decentralized,” explains Steven Liu, head of development at NGD and technologist at Neo Foundation, adding how their native oracle solution combined several features from both designs.

The Neo network offers its users a wide variety of features, including a decentralized file storage system, an identity system, and an oracle system that allows its smart contracts to access external resources.

“Our native oracle API can be directly requested by a smart contract, and it includes a node consensus process, making it a reliable decentralized service,” added Liu, noting that because it adopts an asynchronous pattern, the request processing mechanism and answer that doesn’t. t delays the finality of Neo’s block.

Neo Oracle Service request-response processing mechanism (Source: Neo)

As Liu explained, the Neo council elected by NEO holders consists of 21 members who have different responsibilities. One is choosing oracle nodes that will provide reliable data to smart contracts.”

“These nodes are paid and rewarded for answering oracle requests, but the Council can remove and even replace them in the event of poor service or misconduct.”

When asked about some of the biggest challenges that surround current research and development of blockchain oracles, Edgar pointed out that until now “no one has really built an oracle that works without trusted parties, while at the same time being immune to bribery.” .”

Oracles are pivotal when it comes to leveraging blockchain technology for anything other than native assets, and their ability to harness true decentralization and ambiguity emerged as a burning problem that will define future systems and services that rely on integrity. and data security.

While the most common approach relies on third parties supplying the data and signing the information, token voting emerged as an alternative, more decentralized approach.

“Oracles determine the input of a smart contract, which in turn affects what the smart contract actually does,” explains Hart Lambur, the co-founder of UMA, a decentralized financial contracts platform based on the Ethereum blockchain.

“While blockchain data becomes immutable after being committed to the ledger, it is not verified before, leaving oracles and by extension smart contracts open to manipulation,” noted Lambur, arguing that UMA’s optimistic oracle addresses this issue. disputes using a unique dispute resolution system.

Anyone can push an answer on-chain, and there will only be a dispute if the answer is wrong.

“We call this resolution system ‘optimistic’ because data is accepted as true unless it’s contested,” he said, noting that compared to traditional price feed oracles, optimistic oracles can bring super-specific data on-chain in a way that doesn’t rely on nodes. .

Joining the Optimistic Oracle does not require a contract launched at UMA (Source: UMA)

“Economic incentives maintain accuracy, as anyone can earn rewards by responding to a question and would lose money if they are incorrect and contested,” Lambur concluded.

Addressing data bias and agreeing on one absolute truth

“While we are able to form decentralized organizations, allowing token holders to vote on issues, in theory there are situations where it can be profitable to bribe those voters into voting a certain way,” Edgar added.

Although the voting systems for token holders proved to be quite robust in practice, that does not necessarily mean that they cannot be manipulated, according to Edgar.

“You really don’t see these voting systems breaking down right now, but you never know,” he argued, explaining that “with crypto you’re going to run things for a very long time, and then someone will successfully attack some of them, and then similar attacks will follow.”

“Augur, a decentralized oracle and prediction market platform, has a kind of design with no reliance on trusted parties, but it has a so-called security boundary,” Edgar added, noting that there is a certain amount of money it can secure without, at least in theory, “attack profitably.”

In extreme cases, Augur’s approach allows the system to split into multiple copies—allowing people to use any version they want—to eventually reveal which of these systems is more valuable. This approach was originally proposed by Paul Sztorc in the truthcoin whitepaper† Edgar is currently working on a design that goes one step further, in extreme cases even a very low-2 ledger.

People who want to communicate with each other eventually have to agree on some kind of common view of the world – sticking to what they consider to be true.

“With the kind of forking approach Augur uses, it’s possible you get two economies,” Edgar noted, underlining that “a blockchain cannot prove which worldview is correct, but we can make each worldview coordinate with itself, and let people talk to each other in whatever reality they want.”

“We can also determine which worldview is most valuable in cash – but again – that’s not necessarily true,” he added, concluding that “blockchains are a tool for coordination, and the best we can do, is coordinating between people with the shared worldview.”

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