Oracles are third-party services that feed smart contracts with external information. They serve as the bridge between a blockchain and any outside information. Oracles will play a crucial part in the general success and adoption of blockchain as the industry matures and develops going forward. But what are oracles? Where do they come from? Why are they crucial for success? What is the oracle problem? And who is currently winning the race when it comes to being adopted as the standard?
What Are Oracles?
According to the Britannica an oracle is defined as:
Oracle, (Latin oraculum from orare, “to pray,” or “to speak”), divine communication delivered in response to a petitioner’s request.
The word or idea of an oracle can be traced back to ancient times. The most famous is that of the ancient Greek oracle Apollo at Delphi. They served as the bridge of communication between gods and humans. This core concept hasn’t changed, instead of gods and humans, it is now blockchains and external information.
Why Are They Needed?
Blockchains cannot innately access external information. This obviously limits the number of use cases they can satisfy. Many contractual agreements require outside information to reliably execute and fulfil the agreement.
The use of oracles will greatly broaden the scope of what smart contracts can do. This provides greater functionality to the blockchain ecosystem as a whole.
To provide an example let us take Alice and Bob, they want to take a bet on whether it will rain on a certain day. Both Bob and Alice are required to send the amount they want to wager to a smart contract. Once the money has been transferred, the smart contract now acts as an escrow agent. However, this smart contract doesn’t have the ability to decide who is wrong or right as it is just code being run on a computer. What Alice or Bob need to do is decide on an appropriate weather service to feed the data into the smart contract which will ultimately determine who is the winner or loser. The outcome is binary, it either rains or it doesn’t. Once this data is fed through the oracle by the weather service to the smart contract it will automatically execute and pay the appropriate party.
The Oracle Problem
You should now understand why oracles are an essential part of the blockchain ecosystem. However, they do have a problem. Let us take the above example. Imagine that Alice has a friend at the weather service, if she wanted to cheat, she may be able to get the weather service to lie about the outcome of the bet. When billions of dollars are at stake in a derivatives market or a financial transaction this is a situation you want to avoid. Therefore, having as many data inputs as possible increase the reliability of the information being fed to the blockchain. You need to be able to reward those providing accurate information and punish those who provide the opposite. The service who can do that most efficiently may be adopted as the ‘gold standard’ of oracles.
Who is Currently Winning the Oracle Race?
The are many measures of success that could be looked at to determine who is currently in the lead when it comes to who has solved the oracle problem. We at Etherbridge believe that it is currently Chainlink. Chainlink through various incentives and disincentives has managed to start bridging the gap between the blockchain and the real world, they have also manged to start bridging different blockchains to one another. People who want to provide data to smart contracts using the Chainlink oracle service are required to put up the LINK token as collateral, this collateral should usually equal or exceed the value of the data it is transferring. This ensures that if they are caught lying about the data provided (determined through a majority consensus) the party who is reliant on the data will be protected. The data provider is also renumerated in the LINK token for providing this data, ensuring incentives are aligned.
As the blockchain industry grows oracles will serve as a piece of critical infrastructure that is required for this new technology to reach its full potential. It will also act as an enabler and bridge other fourth industrial revolution technology such as AI and IoT to the blockchain.
Whilst we all have the option to look, to seek to understand, it’s often easier not to. Bitcoin, Ethereum and distributed ledger technology are complex systems that require significant due diligence. At Etherbridge we aim to lower the barriers of understanding this fast-growing digital economy.
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This is not financial advice. All opinions expressed here are our own. We encourage investors to do their own research before making any investments.