Blockchain Oracles: A Comprehensive Overview
Decentralized exchanges, blockchain games, lending and borrowing platforms, decentralized insurance protocols, and NFT marketplaces are just a few examples of the DeFi and GameFi dApps that depend on blockchain oracles. But they’re also essential for more conventional uses, including obtaining the pricing of traditional assets like stocks and bonds, collecting vital supply chain data (including IoT data), and confirming identity information for businesses and governments.
As stated earlier, one of the main drawbacks of traditional blockchain smart contracts is the blockchain oracle problem, which arises when the contracts are unable to access external, real-world data in order to carry out predefined activities.
Blockchains’ separation from real-world data might be advantageous because it reduces network outages and avoids problems like double-spending attacks, which happen when someone tries to spend the same coin twice.
But without access to actual data, smart contracts are essentially worthless as they lack the knowledge necessary to carry out their intended functions. As a result, blockchain oracles serve as a link between the closed blockchain environment and the open data environment seen in everyday life.
Centralized oracles pose serious problems since blockchain applications are only as safe and decentralized as the data they use. Regretfully, this also applies to decentralized oracles that, whether on purpose or accidentally, maintain a certain level of centralization. In particular, inadequate availability, limited accuracy guarantees, and poor incentives for node operators/data producers are the consequences of adopting centralized oracles.
High degree of accuracy, low latency, quick finality, high decentralization, and low latency are characteristics of effective blockchain oracles. Oracle decentralization is measurable in a number of ways. Among them are:
Consensus, Cryptographic Verification, and Node Count
The number of unique nodes on an oracle network, how those nodes reach a consensus, how those nodes collect and report data (including the number of data sources used), and how that data is cryptographically validated on-chain are some indicators of oracle decentralization and efficacy. In general, more decentralized and consequently more successful oracles are those that leverage more data sources, have more unique nodes, and employ safe cryptographic proofs like ZK-Rollups.
Oracle Finality and Latency
The interval of time between initiating a transaction and receiving the first acceptance confirmation from a network is known as latency. Finality, on the other hand, is the amount of time needed for the data to be published on-chain and cryptographically validated. Lastly, oracle accuracy denotes the accuracy of the information the oracle has delivered. Even though an oracle has low latency, the execution of smart contracts may be severely slowed down if it lacks rapid finality. This might result in slippage or other possible financial losses.
Stake and Reward Systems
Decentralized oracle networks typically pay their node operators with the native token of their network, such as $API3 for API3 or LINK for Chainlink. Node operators receive rewards for high-quality data and penalties for low-quality data. In most cases, in order for protocols, apps, or other organizations to access the oracle’s data, they must first stake a particular quantity of the network token.
Tokens can serve as data payloads in some scenarios, supplying smart contracts with data from off-chain sources. Each node will often aggregate data from several sources during the process, and a collection of nodes will combine to do a meta-aggregation of the data, which will deliver the final data at the end.
Both Attributability and Accountability
Oracles that encourage a high level of responsibility for data producers, as we just discussed, typically reward providers for timely, accurate, and high-quality information while penalizing them for inaccurate or low-quality information. The top node operators, for example, can receive extra token awards. On the other hand, operators of fraudulent or inferior nodes can have their staked tokens reduced, which means that the network will really remove some or all of their tokens. The node operator may be prohibited from using the network in extreme circumstances. Attributability, or the capacity to link a piece of data to the source, is also required for accountability to functio
