Oracle Problem

Last Updated on 6 hours by Irfan Khan

The oracle problem is a significant obstacle hindering the wide adoption of smart contracts across various marketplaces and other cases. Oracles are information sources. They bring information off the blockchain (off-chain) data sources, e.g., web APIs, IoT devices, payment systems, cloud providers, data providers, backends etc. Afterwards, they place it on the blockchain (on-chain) for usage by smart contracts. A gateway from the outside world is required for smart contracts to interact with decentralized mechanisms such as weather, stock prices, or political events. Hence, oracles act as the intermediary between the real world and blockchain.

The Oracle Problem

Despite acting as a middleman between blockchain and the traditional world, oracle infrastructures possess diverse issues. The oracles jeopardize the blockchain’s promise of immutability. The information gained by oracles becomes unchangeable until it is added to the decentralized ledger. This can pose a security threat for blockchain developers due to the possibility of inaccurate information.

Furthermore, it brings up the following issue: Who verifies the data provided to the chain? In essence, there is a danger when oracles originate in centralized locations requiring outside parties’ authorization. The conflict here is between conventional notions of blockchain trust and the veracity of data from Oracles. The Oracle Problem is the usual name for this dilemma.

Brian Curran, Blockchain enthusiast and Vice President of software Savoye, explains the Blockchain Oracle Problem as “the trust, authenticity and security issues among the trustless smart contract executions and the third-party oracle.” The inability of oracles to ensure the accuracy of their data leads to the blockchain oracle Problem. Furthermore, each kind has a different potential for malfunction and intentional manipulation.

Examples of the Oracle Problem

Using a centralized oracle comes with the following problems:

• Low Correctness Guarantees:

There is no way to verify whether centralized oracles’ information is accurate. Even if the oracle provider may be “reputable,” it is still possible for someone to go rogue or for a hacker to mess with the system. The execution of smart contracts will be based on invalid data if the oracle becomes corrupt.

• Poor Availability:

Other smart contracts may sometimes have access to off-chain data when using centralized oracles. Your smart contract is vulnerable to a denial of service (DoS) attack if the service provider stops providing it or a hacker takes control of the oracle’s off-chain component.

• Poor Incentive Compatibility:

For the data source to transmit accurate/unaltered information, centralized oracles frequently have weak or nonexistent incentives. Paying the oracle for assistance could make people behave honestly, but more is needed. The reward for altering oracle data is now higher than ever because smart contracts control vast amounts of money.

The Solution to the Oracle Problem

The Oracle Problem impedes the development and use of oracles, although they have greatly aided in tokenizing physical assets. Oracles must provide dependability and assurance of security to defeat their disadvantages. The widely acknowledged answer to this conundrum is a decentralized oracle. Decentralized oracles operate numerous information sources and supply the most accurate version. They further lessen the potential occurrence of a singular failure point. Undoubtedly, decentralized oracles are highly advantageous, with benefits across accuracy, evidence of authenticity, and compatibility with good incentives.

Conclusion

Blockchain oracles are vital in advancing the blockchain industry due to their numerous advantages in providing information. However, a failure to address the oracle problem will ultimately threaten the investigation and development of blockchain applications.

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About Irfan Khan

Irfan Khan is an esteemed professional known for his strategic contributions to the banking industry, particularly in the realms of financial technology and innovation. Holding a Master’s degree in Finance, Irfan has built a distinguished career by leveraging his deep understanding of financial systems and technology to drive operational excellence and digital transformation in banking. With extensive experience in developing and implementing innovative banking solutions, he has played a pivotal role in enhancing customer experiences, streamlining operations, and introducing cutting-edge technologies to traditional banking environments.