Decentralized Oracles: Solution to the Blockchain’s Oracle problem


“Blockchain Technology suffers from an Oracle problem that limits its use cases to bare minimum and thus to solve the oracle problem decentralized Oracles such as Chainlink are the best solutions available.”

The Oracle Problem in Blockchain

The blockchain technology is known for its high end security and this security comes with a tradeoff. For ensuring its security a block chain works in a silo, meaning thereby that it is incapable of communicating with the outside world. In order to communicate with another blockchain, a bridge is required and vulnerability in another blockchain can result in security compromise of both the blockchains connected with a bridge. Even if two or multiple blockchains are connected through a group, these blockchains cannot communicate with external data.

Thus even after introducing the concept of smart contracts, their use case is extremely limited as to execute a smart contract reliable live external data feed may be required. To solve this problem, the concept of oracle was introduced in which a centralized oracle will be responsible for fetching the data from the real world and converting it into the smart contract language and feeding the data as input to the smart contract. Though it solved the oracle problem, the issue of reliability still remains unsolved as due to the centralized nature of the oracle, the information can be manipulated and tampered with.

The Solution: Decentralized Oracles

To ensure that all the data from the external source obtained by the oracle is reliable and accurate; the concept of decentralized oracle was introduced. The decentralized oracle works in the same way as a normal blockchain that connects multiple nodes peer-to-peer and there is no single authority that controls or manages the oracle. This makes the process decentralized and autonomous and solves both the problems (oracle problem and the Reliability Problem) with a single arrow.

Chainlink (LINK) is the largest and the first decentralized oracle that is powering almost 90% of the blockchains. Chainlink has a comprehensive decentralized model to provide reliable off-chain data to the smart contracts on-chain. The high level working of the Chainlink Oracle can be understood using an example. Suppose a business smart contract between Alice and Bob has been written on Ethereum Blockchain which will be executed when the products from Bob will reach Alice and once delivery is confirmed, the payment for the Product will be transferred to Bob automatically by the Smart Contract.

The problem here is that, how would a smart contract know if the product is delivered and a confirmation is received. The smart contract will deploy Chainlink for fetching this information and once the request is made, the core module of Chainlink will convert this request into real world language and transfer to its distributed network of nodes for fetching the information. Each node that is ready to fetch the information, will lock their LINK token as a collateral to ensure that they provide the reliable and accurate information. Once all the nodes fetch the information, the information will be verified in a decentralized mode among all the nodes. The nodes with the accurate information will be incentivized and the nodes with inaccurate information will be penalized from the collateral deposited.

The Core module will then again convert the information into smart contract readable format and provide it as an input to the smart contract thus helping its execution.

Disclaimer: The article is just to provide information and shouldn’t be considered as any financial advice. It is advisable to conduct thorough research before investing in any cryptocurrency.

Photo by – Uriel SC on Unsplash