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What is Blockchain Oracle Problem and how Chainlink solves it?


The word “oracle” originates in Greek mythological stories and refers to those who can communicate directly with god and predict the future. However, unlike the oracles of Greek mythology, oracles (on the blockchain) do not predict the future; instead, they retrieve data from the past. To be specific, oracles do not explicitly insert data into the blockchain; instead, they collect and store data from the real world.

Oracles are platforms that will provide information about the real world to the blockchain in the blockchain environment. If smart contracts are not used for cryptocurrency exchanges but rather for a decentralized mechanism that involves weather, stock prices, or political events, an external gateway is required. Oracles serve as a gateway, processing external and deterministic data and converting it to a format that a blockchain can understand.

Depending upon the traits governing source, the direction of information and trust, blockchain oracles are classified as:

  • Software Oracles
    They interact with online information sources (databases, servers, websites) and pass it to blockchain smart contracts in real-time. The information comprises digital asset prices, exchange rates, real-time flight information, etc. 
  • Hardware Oracles
    These oracles retrieve information from electronic sensors, barcode scanners, and other information-reading devices. Hardware oracles transmit real-world events into digitally understandable form to smart contracts for executing decisions.
  • Inbound and Outbound Oracles
    Inbound oracles send information from external sources to smart contracts. For example, the temperature measured by the sensor is notified to smart contracts. On the contrary, outbound oracles carry the information from smart contracts to the external world. For example, when funds get deposited to a particular address, the smart contract sends this information to a mechanism for unlocking the smart lock.
  • Centralized and Decentralized Oracles
    A single entity governs centralized oracles, while decentralized oracles do not rely on a single source to transmit the information to smart contracts. A single point of failure directly hampers the centralized oracles, while decentralized oracles build trust and are hence regarded as consensus oracles.
  • Human Oracles
    Individuals with specific knowledge in a particular aspect can also be regarded as oracles. With in-depth research, they can verify the authenticity of the information from various sources and transmit it to smart contracts. As humans are involved in verifying their identity with cryptography, the possibilities of fake identity fraudsters and data corruption get reduced.
  • Contract-specific Oracles
    These oracles are developed to be used by a single smart contract. As they are designed from scratch to serve a specific purpose, developers can tailor them to specific needs. They are time-consuming, expensive to maintain and cannot be used to extract information from different sources.

What is a Blockchain Oracle Problem?

The Blockchain Oracle Problem results from the inability of oracles to verify the integrity of their data. Additionally, the likelihood of malfunction and deliberate tampering varies by type.

As mentioned below, the Blockchain Oracle Problem is divided into two parts:

  • Blockchains cannot access external data on their own.
  • Using centralized oracles negates the benefit of smart contracts — and introduces significant privacy issues.

Talking of the blockchain and smart contracts, the Blockchain Oracle Problem concerns the attributes like credibility and oracles’ reliability. Blockchain enthusiast Brian Curran, Vice President of software Savoye, describes the Blockchain Oracle Problem as the trust, authenticity and security issues among the trustless smart contract executions and the third-party oracle.

Legal research and teaching assistant Alexander Egberts addresses the oracle problem as two steps backward from decentralization. As the oracles do not have the distributive attribute, the single point of failure is again introduced. The trustless peer-to-peer interaction needs to be eliminated in the oracles trusting their reliability, as they function based on the non-deterministic data. Implementing oracles through smart contracts could also hamper the users’ trust, who confide in blockchain more than the legacy network. Additionally, an oracle-based system can fail in two ways. Suppose the oracle is trusted and cannot be jeopardized. In that case, there is still a possibility that the data on which it is operating has been altered, in which case, despite being a trustworthy device, it will feed false data to the smart contracts.

On the other hand, if the information is trusted and verified, the oracle may fail to function properly on the smart contract due to a malfunction or deliberate tampering. From a game-theoretic perspective, it can be demonstrated that the higher the value of the smart contract, the greater the incentive to compromise the system.

The oracle problem is also triggered when real assets are attached to the blockchain via smart contracts. Linking a physical asset to a digital asset, whether fruit, cars, or houses, is critical in decentralized contexts (e.g., blockchain/smart contracts). Tangible assets are governed by the jurisdiction in which they are located, which means they are governed by something (in some cases, something more) other than the smart contract. Indeed, this entails having faith in something other than the smart contract. If a smart contract, for example, involves the transfer of property between two agents, the code will surely swap the certificate between the parties.

How does Blockchain Oracle Work?

The functions of a blockchain oracle are mentioned below:

  • Listen
    Analyze the blockchain system to find if any incoming user or smart contract asks for off-chain information.
  • Extract
    Extract information from single or different systems that are external, for instance, off-chain APIs hosted on web servers.
  • Format
    Initiate two systems to communicate internally by arranging the data taken out from APIs into a format that is blockchain readable (input) and/or creating blockchain data adaptable with an API (output) that is external.
  • Validate
    Make a cryptographic validation to authenticate the services performed by the oracle with the help of the combo of data signing, blockchain exchange signing, TLS signatures, etc.
  • Compute
    Conduct some type of computation on the data, such as estimating the median from numerous oracle entries or performing more complicated tasks, such as producing an insurance quote from a variety of different types of data (personal risk profile, market rates, cost of capital, etc.)
  • Broadcast
    Sign and broadcast a transfer of funds on the blockchain as a means of transmitting data and the corresponding proof of the transaction on the blockchain for the smart contract’s use.
  • Output (Optional)
    Send information to an outer system as a result of the execution of a smart contract, for example, by relaying payment instructions to a traditional payment network or by affecting a cyber-physical framework.

Have you ever wondered why Chainlink is preferred over other blockchain networks when it comes to resolving the oracle problem?  The answer to this is that the token existing on this platform provides a financial incentive for the ChainLink network to function properly. With an integrated reputation system, bidding system, and a decentralized network based on separate oracle service providers, users are confident that their data is trustworthy because it is validated by numerous independent sources.

Chainlink: A Secure and Reliable Standard of Oracle Network

Chainlink is defined as a decentralized network of oracles that enables smart contracts to interact with non-blockchain data and services securely. With Chainlink, the traditional platforms that currently power modern economies can connect to the emerging blockchain industry, enhancing business and social processes’ security, efficiency, and transparency. With cryptocurrency and blockchain technology gaining widespread attention. Chainlink is establishing itself as a critical component of numerous blockchain applications. More people are entering the industry and wondering what Chainlink is.

Chainlink is an oracle network that feeds real-world data to blockchain-based smart contracts. On the blockchain, smart contracts are pre-specified agreements that evaluate data and execute automatically when certain conditions are met. LINK tokens are digital asset tokens that are used to pay for network services.

Chainlink helps by providing an intriguing decentralized way to authenticate the data from oracles and the relevant output data of smart contracts. ChainLink analyzes the issues with centralized oracle feeds as a single point of failure and gives a solution through a “middleware” jeopardized of a decentralized oracle platform. Crucially, ChainLink identifies and authenticates data before it becomes a trigger for a smart contract.

The individual nodes on Chainlink serve as smart contracts and execute computations to verify the data accuracy to be fed into the smart contracts. Chainlink provides various useful features such as:

  • Secure Connectivity
    Smart contracts are integrated seamlessly on different networks to existing applications & external data.
  • Instant Payments
    It becomes possible to make payments from smart contracts to existing bank accounts & widely used payment networks such as PayPal.
  • High Interoperability
    Builds secure cross-chain connectivity between smart contracts & any other public (Ethereum) or private network (Hyperledger).

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How does Chainlink overcome the issue of Blockchain Oracle?




Chainlink uses a model or structure which is quite similar to that of a blockchain. There is a decentralized network of autonomous oracles) that together retrieves the data from various sources, aggregates it, and delivers a validated, single data point to the smart contract to push the speed of its execution, thereby eliminating any single failure point.

For instance, Chainlink provides the USD cost of Ethereum’s native cryptocurrency, ETH, to blockchains via the ETH/USD Price Feed, which sources and delivers the price data via a network of independent oracle nodes and data sources. The oracle of ETH/USD price can then be utilized by a blockchain application to determine the current value of ETH when it is used as collateral for a loan or to settle a prediction about the future value of ETH.

Additionally, Chainlink incorporates multiple layers of security beyond decentralization to ensure that users can trust the oracle network. Chainlink is a flexible framework for developing and operating Oracle networks, which means that users can build and connect to customized Oracle networks independently of other Oracle networks.

Components of the Chainlink Network

  • Open-source
    As an open-source technology, Chainlink’s source code and functions can be independently verified for security and reliability, as well as contributed to its enhancement.
  • External Adapters
    Enables nodes to store API keys and manage account logins securely. It enables smart contracts to retrieve information from any external device or API, including those safeguarded by a passcode or credential.
  • Decentralization
    Implementing decentralization at the node and data source levels ensures that no single node or data source is one point of failure, providing users with strong assurances that data will be delivered as promised and will stay resistant to tampering.
  • Data Signing
    By requiring nodes to sign the data they provide to smart contracts cryptographically, users can determine which nodes sent data and review their history to ascertain their overall performance.
  • Service Agreements
    By establishing binding on-chain contracts between the demanding smart contract and the oracle supplier outlining the terms of the oracle service and associated penalties/rewards for performance, users can obtain enforceable guarantees regarding their off-chain data requests.
  • Reputation Systems
    Feeding signed on-chain data into reputation systems enables users to make educated decisions about which nodes are trustworthy and not based on a variety of metrics such as completed jobs, clients served, average reaction time, etc.
  • Certification Services
    Enabling nodes to enhance their security and reliability to users by acquiring any number of certifications can provide certain critical guarantees such as KYC, geographic location of the node, and security reviews of their facilities, among others.

Chainlink is also developing optional attributes such as advanced oracle computations, advanced oracle computations, oracle and data privacy, and much more. By ensuring high security and credibility guarantees on par concerning the blockchain, Chainlink oracles enable more advanced smart contracts.

If you are looking to overcome blockchain oracle issues in your blockchain ecosystem or connect smart contracts to third-party APIs, we can assist you by providing our Chainlink blockchain development services. Contact our team and get started. 

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Author’s Bio

Akash Takyar
Akash Takyar
CEO LeewayHertz
Akash Takyar is the founder and CEO of LeewayHertz. With a proven track record of conceptualizing and architecting 100+ user-centric and scalable solutions for startups and enterprises, he brings a deep understanding of both technical and user experience aspects.
Akash's ability to build enterprise-grade technology solutions has garnered the trust of over 30 Fortune 500 companies, including Siemens, 3M, P&G, and Hershey's. Akash is an early adopter of new technology, a passionate technology enthusiast, and an investor in AI and IoT startups.

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