Smart contracts running on chains like Ethereum provide various use cases to the Blockchain technology. By nature Smart contracts on Blockchain are trustless , immutable, relying on consensus mechanisms to validate transactions and maintain the integrity of the data stored within them. But they are not very good at accessing information and data outside the Blockchain i.e a Blockchain is like a stranded island greatly connected within itself but cut off from the outside world.
Which means a Smart Contract can operate an entire game or App for you but it can’t show the number of likes you got on your latest Instagram post. Depressing isn’t it. Here comes Oracles by helping Smart contracts to get real world data which can be used to make Exchanges, DApps, DeFi and many other great stuff.
But what is the Oracle Problem ?
To be precise Oracle problem is the trust conflict between third party Oracle networks and trustless or trust minimizing Smart contracts. Difficult to digest?
No problem, we'll understand the entire topic deeply in the blog.
Oracles make Blockchain solutions and Smart Contracts more Scalable, but not without a cost
Problems with Oracles (Centralized !)
Although Oracles might seem like a great solution to the scalability challenges of Blockchain but it comes with its own challenges.
Any Blockchain operates on thousands of nodes which ensures that even if many or almost all the nodes fail, the Blockchain will remain secure. But an Oracle is a single node feeding Blockchain information from various off-chain data sources. And if that node is to fail, the entire Blockchain will come to a halt!
- Trust and Reliability : If a single Oracle is compromised or provides incorrect data it can affect the entire Smart Contract and organization built on it.
- Centralization : Relying on a single or even few Oracles can cause centralization.
- Data Integrity : Ensuring that data provided by Oracles is correct and tamper proof is challenging.
Also relying on a single source of information without validations is neither secure as it will be prone to attacks and downtime nor Decentralized which are the other core pillars of Blockchain.
Centralized vs Decentralized Oracles
Decentralized Oracles like Chainlink are the possible solution to the “The Oracle Problem” as they don’t rely on a single entity for the source of data.
They employ a network of independent nodes to fetch, verify, and aggregate data from multiple sources, ensuring accuracy and reducing the risk of manipulation. By using consensus mechanisms similar to Ethereum and economic incentives for Validators, decentralized oracles maintain data integrity and trustworthiness
Features
Centralized Oracles
Decentralized Oracles
Control
Single Entity
Network of independent nodes
Data Integrity
Prone to manipulation
Verified by multiple nodes, higher integrity
Security
Lower security due to centralization
Higher security due to decentralization
Single Point of Failure
Yes, vulnerable to failures or attacks
No, multiple nodes reduce the risk of a single point of failure
Use Cases
Simple, low-risk applications
Complex, high-stakes applications requiring high trust
Examples
Single API Providers
Chainlink $LINK
Conclusion
To summarize it, Blockchain can't read the data which is off chain or on the web so they need Oracles to read it for them. But the Blockchain is a decentralized entity and it relies on an Oracle for data , which can be wrong or misinterpreted, it serves no purpose.Here Decentralized Oracles like Chain link comes to play which works similar to Blockchain and keeps the process decentralized.
With the rise of Blockchain and Smart contract use cases across fields, the need for Oracle services will go up only. Any Blockchain update won't be able to solve the Oracle problem as it would mean to change the fundamentals of the system so the Blockchains will continue to rely on Oracles like Chainlink $LINK.
