Smart oracles: The quest for real-time and accurate information

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  Quantumrun Foresight
• June 16, 2022

Insight summary

Smart oracles bridge the gap between real-world data and blockchain technology, enhancing decision-making in finance and other sectors. However, they face challenges, such as potential data inaccuracies and vulnerabilities to cyber attacks, impacting their reliability. These technologies can prompt regulatory changes and increased user reliance, signaling a shift in how digital transactions and data handling are evolving.

Smart oracles context

Indices, stock markets, and other indicators assess the economy’s health and well-being. Smart oracles might be able to provide updated, real-time data to make timely decisions. However, they can also be a source of erroneous information.

An oracle permits collecting data from external sources, transferring, and inserting that data into a decentralized application. The typical oracle ecosystem consists of three parts:

1. The data source: This is where information is initially gathered and stored. A decentralized application might not use it, but it still contains valuable information. Some data source examples include web application programming interfaces (APIs, often used in open banking), sensors, or people with first-hand knowledge about an event.
2. A “node”: A device that generally collects data from the data source and then sends it to a smart contract to execute the agreement. 
3. Finally, a smart contract: The smart contract is a computer protocol intended to digitally facilitate data organization and verification. It often contains a set of standards that the data must meet to be accepted or rejected. Smart contracts allow for automated payments and other transactions if conditions are met.

Oracles enable interoperability, which acts as a link between the physical world and smart contracts. They also allow for communications with legacy networks in global financial markets, making them ideal for gathering real-time and verified information.

Disruptive impact

Decentralized blockchains, like Ethereum, can maintain secure and transparent ledgers and histories, smart contracts facilitate complex interactions, and oracles link everything to the real world. While it may appear straightforward at first glance, several difficulties arise as networks become more complicated. One potential risk is oracles becoming single points of failure that might create havoc if incorrect or outdated information were to slip into protocols.

Experts point to the Oracle Dilemma as the main weakness in introducing oracles to decentralized environments. Smart contracts execute based on inputs. Since these codes rely on the consensus of other nodes maintaining an internal ledger, input verification may be performed in a decentralized manner. External oracles complicate matters since the inputs can’t be verified “on-chain” by agreement. As a result, data from oracles must be accurate to be useful for practical applications such as ID verification, Internet of Things (IoT) devices, insurance companies, finance, and gaming.

One possible way blockchain developers are addressing this dilemma is through cross-chain bridges. A blockchain bridge is a middleman that connects different blockchains operating under different rules. This cross-compatibility permits the movement of tokens, data, and smart-contract instructions, among other platforms. These emerging platforms include Polkadot, Cosmos, and the NEAR protocol.

Implications of smart oracles

Wider implications of smart oracles may include: 

• The development of more interoperable oracle systems that can seamlessly transfer information safely and accurately.
• Reduced fees for blockchain transactions due to more platforms competing for users.
• Smart contracts becoming the preferred payment method because of their accuracy and convenience.
• Instances when urgent data are incompatible with another platform.
• An increase of cybercriminals manipulating external oracles to corrupt and influence private blockchain networks.
• Enhanced transparency and reliability in data sourcing for blockchain technologies, fostering trust among users and investors.
• Governments adopting stricter regulations for smart oracles to safeguard against manipulation and ensure data integrity.
• Consumer reliance on blockchain services intensifying due to increased efficiency and security in transactions.

Questions to consider

• If you’ve used smart contracts, how accurate are they?
• What are the other possible advantages of real-time data that someone can access on different blockchain platforms?