Blockchain Technology with Smart Contracts: What is an Oracle?
July 10, 2019
Blockchain Technology with Smart Contracts: Smart contracts are a cost-effective, secure, accurate, and autonomous way to fulfill a set of obligations in a digital form. However, Smart Contracts do have a problem with incoming data verification from outside the blockchain. This problem is a critical stumbling block preventing smart contracts from unlocking its true potential. Hence, Oracles find birth in this need.
An overview of Oracles
First, it is better to understand the basics of a smart contract. A smart contract is an automated working program that activates based on certain conditions. A smart contract lays out the terms of a contract that creates an agreement between parties involved. These terms are pre-determined and are immutable once coded into the blockchain system. For instance, a firm can upload their right of asset ownership onto the blockchain for subsequent purchasers to purchase. Each step of the process is documented within the smart contract on the blockchain and is fully transparent to both parties. However, once the smart contract is coded and takes effect, no changes can be made to the contract.
While the above sounds ideal for the integrity of the transaction, real-life situations are complex. Extenuating circumstances usually arise. Hence the terms as previously outlined in the smart contract may not be as concise as before. Also, it could be that the terms of the contract require real-world information to determine if the execution is required. For instance, if person A and person B were to pay ETH on a specified time, the price of ETH at that stipulated time would be required to execute the transaction.
This inevitable need for real-world information beyond what a smart contract can obtain gives rise to the need for oracles.
How do Oracles work?
Oracles are pools of reliable data gleaned from the off-chain world fed to smart contracts present in the blockchain. A sample illustration of how the transaction happens is here:
Oracles become a mediator, transferring information between the smart contracts of the digital world and information sources in the real world. Furthermore, 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] consensus mechanisms.
In Proof of Work (PoW) Consensus: When Oracles are programmed well and 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 information being recorded in the blockchain. Hence Oracles provides a checkpoint mechanism in Proof of Work.
In Proof of Stake (PoS) Consensus: The PoS scheme contains a vulnerability that allows the majority stakeholder to control the blockchain in a significant way. In this case, the oracle can cap the resources available and prevent significant stakeholder from entering and exploiting the system, thereby maintaining system stability.
Blockchain Technology with Smart Contracts: Oracles are vital in determining the success of smart contracts and also to keep them more sophisticated than manual contracts. They provide information that smart contracts require from the real world to execute the transactions that can be verified by all nodes in the blockchain system. Furthermore, they function as balancing mechanisms within the blockchain to prevent exploitation and misuse.
Oracles are vital in determining the success of smart contracts and also to keep them more sophisticated than manual contracts. They provide information that smart contracts require from the real world to execute the transactions that can be verified by all nodes in the blockchain system. Furthermore, they function as balancing mechanisms within the blockchain to prevent exploitation and misuse.
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