A fundamental paradox in the blockchain ecosystem is the fact that blockchain networks like Solana or Ethereum are known for their security and immutability, but are basically “deaf and blind” to anything happening outside their own digital ledgers. Basically, smart contracts have no mechanisms to simply get the updated price of Gold or check if a flight has been canceled without external help. This is where blockchain oracles come in.
The “Oracle Problem”
If all transactions on a blockchain from the network’s creation were replayed, you should expect to end up with the same chain by the end. This is because of the deterministic nature of blockchains. If an API is just integrated into a smart contract, which allows data to be transmitted to the smart contract, it would stop being deterministic and lose network consensus.
The challenge of adding external data to the deterministic environment of blockchain without compromising the decentralization or security is called the “Oracle Problem”.
How the Process Actually Works
Oracles serve the role of intermediaries that convert real-world data into a format that can easily be digested by a smart contract. How exactly do oracles bring real-world data on-chain? See below:
- The Request: the smart contract transmits an “event” or a data request.
- Off-Chain Fetching: This request is received by an oracle node that listens for requests. Once received, the node queries an external data source to get the required data.
- Validation and Consensus: In decentralized oracle networks, multiple nodes receive and process the requests, and the results are compared to reach consensus.
- Reporting: After the consensus is reached, the data is bundled into a transaction.
- On-Chain Delivery: The oracle contract on the blockchain receives this transaction and updates its internal state. The original insurance contract can now read that updated state to decide whether to pay out the claim.
Disclaimer: BFM Times acts as a source of information for knowledge purposes and does not claim to be a financial advisor. Kindly consult your financial advisor before investing.
