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What is Chainlink VRF

The growth of smart contracts as enterprise-grade solutions is widening across various industrial use cases. However, the efficacy of a smart contract is locked up within the blockchain ecosystem because it can only access and read data stored on the blockchain. If smart contracts could access external data sources from the real world, their programmability would greatly increase. With increased programmability, smart contracts would become more useful in real-world use cases. So, what more is needed to bootstrap the growth of smart contracts as a real-world solution? How to make smart contracts capable of accessing data that isn’t stored on the Blockchain?

It can be accomplished with the help of an oracle. Oracle implementation helps connect blockchain smart contracts with off-chain data sources and APIs and facilitates to-and-fro data transfer.

In this insight, we’ll learn more about Blockchain Oracle’s solution and how blockchain networks and applications can incorporate oracles into their ecosystems to make smart contracts and dApps more useful for real-world use cases.

What is Blockchain Oracle?

Oracle, as previously stated, functions as a bridge that connects a blockchain’s smart contracts to external on-chain data sources, off-chain computing, and APIs. In essence, Oracle is middleware software that is built to convert off-chain data into blockchain-based codes that can be read by smart contracts and vice versa.

By utilizing blockchain ledger technology, smart contracts, and cryptocurrencies, Blockchain is providing decentralized alternatives to most financial services, such as sending money around the world, borrowing funds with/without collateral, trading crypto tokens, accessing stable currencies, and many others. While innovative new-age financial solutions such as crypto loans, peer-to-peer lending, and decentralized exchanges already exist, new breeds of DeFi products such as Yield aggregators, DEX aggregators, Insurance platforms, no-loss lotteries, permission-less trading, fixed interest rate loans, and so on are expected to emerge in the future. In some manner, all of these solutions will rely on smart contracts. We cannot expect these solutions to appeal to a global audience if they continue to operate within the confines of the Blockchain. To stand relevant to real-world use cases, Defi products and services will require becoming capable of coordinating with millions of real-world databases.

But the issue here is that smart contracts cannot read the off-chain data format. Thus, if any blockchain application intends to use off-chain data, it requires a system to convert the off-chain data into the on-chain format. That system is Oracle. It simply converts the off-chain data into the on-chain format.

The Oracle Problem – Blockchain needs a decentralized network of oracles

The idea of implementing oracle into a blockchain ecosystem contradicts the very essence of Blockchain, i.e., decentralization. Trusts build on Blockchain data because the data on-chain is validated by a peer-to-peer network regulated through a decentralized consensus mechanism. Blockchain data is deterministic. But if Blockchain procures off-chain data through a centralized oracle, then it is nothing but relying on a centralized source to call data, and it kills the very nature of blockchain. Thus, it is important to question how the oracle validates the off-chain data before passing it to the Blockchain.

The oracle problem is about two things:

  1. Blockchains alone cannot access off-chain data or call APIs directly because the code formats are different.
  2. Blockchains must not use centralized oracles because they nullify the advantage of smart contracts.

In clear words, Blockchain cannot rely on one oracle to retrieve the off-chain data. It needs a decentralized network of oracles to continue being deterministic. A decentralized network of Oracles can enable smart contracts to retrieve real-world data, payment systems, and off-chain computation in a highly tamper-resistant and reliable manner.

  • Decentralized Oracle Network collects data from external APIs, validates, protects, and sends it to blockchain-based smart contracts.
  • Decentralized Oracle Network runs blockchain smart contracts and Layer-2 solutions and does many other types of computations.

What are the benefits of Oracle’s implementation solution for Blockchain applications and networks?

Any blockchain-based system that uses smart contracts like Defi platforms, NFT marketplaces, Blockchain-based games, supply chain systems, enterprise systems, utilities, private and public blockchains, and so on can benefit from Oracle implementation. Oracle implementation solution adds a layer that queries, verifies, and authenticates the information from external sources and relays it to the Blockchain network. Additionally, it offers the following benefits.

On-chain and off-chain connectivity

It enables on-chain smart contract applications and gaming applications to connect with other on-chain data marketplaces and off-chain computation or APIs.

Retrieve external data

Developers of dApps may quickly access thoroughly vetted data from external sources, as well as off-chain computing.

Push notifications

Any smart contract state change is tracked in network logs, and push notifications are sent to off-chain systems.

Decentralized and reliable external data

Provides Defi applications access to tamper-resistant, high-quality aggregated data, safe from risks like oracle exploits and flash loan attacks.

Secure Connectivity

Integrates seamlessly to different networks, existing applications & external data, reducing reliance on third parties and eliminating counterparty risk.

Increase transparency

Integration of data inputs like price feeds from a decentralized network of oracles into any DeFi application provides access to a high-quality and tamper-resistant source of financial market data on a wide range of assets.

Improvements in Defi Development

Oracle’s implementation expands the possibilities for Defi development on a blockchain network by making external data feeds and off-chain computing easier to access.

Facilities Interoperability

Builds secure cross-chain connectivity between any smart contract and any other public (Ethereum) or private (Hyperledger) networks.

How does Oracle implementation function?

When a blockchain application needs off-chain data, it requests data/information to the Oracle network through a Requesting smart contract. On the Blockchain, the oracle establishes a smart contract called Service Level Agreement (SLA) contract. There are three subcontracts under the SLA contract:

  • The Reputation Contract is in charge of authenticating an oracle node’s track record, as well as its authenticity and performance history. It filters out untrustworthy or shady oracle nodes based on its judgment.
  • The Order-Matching Contract sends the Blockchain’s data request to the verified oracle nodes and then returns their bids. It then approves the appropriate number and type of nodes in order to fulfill the data request.
  • The Aggregating Contract sends data requests to the DON’s oracle nodes, but these requests are written in an on-chain programming language. As a result, the nodes employ software to convert the on-chain language into an off-chain programming language that real-world data sources can read. This translated version of the request is then sent to an external API that collects the data from the real-world source. The data retrieved from the API is again translated back to on-chain language and sent back to the Aggregating contract.

What kind of data is accessible through Oracles?

As discussed, Oracle implementation helps smart contracts access off-chain data from sources external to blockchain ecosystems. Via a decentralized Oracle network, the following types of external data sources can be accessed:

  • On-chain Marketplace
  • Price and Market data (on-chain & off-chain)
  • Expanded Computation
  • Verifiable Randomness
  • Maintenance Bot
  • Expanded Computation

How Blockchain Oracle solution supports Defi -A few Examples?

Talking about Defi, oracles play a critical role in creating advanced smart contracts for representing financial products and monetary instruments, particularly those that rely on market data like interest rates, FX rates, asset prices, indices, and more. Let’s understand how oracle implementation help improves Defi systems and solutions.

Money Markets

Financial infrastructure such as blockchain-based money markets that use smart contracts to connect lenders with borrowers can incorporate Oracles to ensure the platform’s solvency by using external price feeds that help track the valuation of assets used on the platform. It helps ensure that loans are issued at fair market prices, and undercollateralized loans receive automatic liquidations.

Decentralized Stablecoins

Oracles are important to improve the functionality of decentralized stablecoins. Decentralized stablecoins are overcollateralized by on-chain cryptocurrencies and are pegged 1:1 to fiat currency, most commonly the US dollar. To sustain full collateralization (e.g., a user’s collateral is worth over 150 percent of the loan’s value), they need real-time access to fiat price data.

Algorithmic Stablecoins

Algorithmic stablecoins strive to keep a peg to another currency, such as the US dollar, and they employ automatic rewards and penalties to keep the price close to the peg. They need price feed because, accordingly, they burn the stablecoin in times of deflation and mint more stablecoins in times of inflation.

Future Smart contracts

Future smart contracts are financial instruments that bind traders to purchase or sell a specific asset at a fixed price at a future date. Hedging is a typical application of future smart contracts, and these contracts require users to collateralize their long or short positions. Price feeds from oracles can be used to effectively assess whether or not liquidations should take place in such contracts. It aids in guaranteeing that each contract is always properly collateralized.

In addition to the aforementioned use cases, Oracle is useful in Defi services such as Credit Default Swaps, Synthetic Assets, Bonds, Automated Asset Management, Tokenized Portfolio Management, Revenue Sharing, Proof of on-chain and off-chain reserves, Yield Farming, Automated Market Maker, and so on. Beyond Defi, Oracles are also important in external payments, NFTs, Gaming, Randomness, Insurance, and Enterprise systems.

Blockchain Oracle solution by LeewayHertz

We are experienced in offering Oracle implementation solutions to protocols, Defi applications, smart-contract applications and others. Our oracle implementation solution is an end-to-end service executed through the following steps of deployment:

Wallet development and setup

The first step is wallet development and configuration for accommodating the tokens required for triggering the Defi smart contracts.

Obtain Testnet tokens

The next step is to obtain testnet tokens and send them to the wallet so that the Requesting Smart Contract can begin sending data requests to the decentralized oracle network.

Development of Requesting Smart Contract

Next, we develop the basic standardized smart contract to initiate the data requests from external sources via an oracle. The contract is modified to suit specific client requirements.

Deployment and testing of Smart contract

The contract is then deployed to the Testnet and funded with a token from the wallet, allowing it to submit queries to the oracles in the decentralized oracle network.

Filing of a data request

The request function sends the request to Oracle when the Requesting contract has been launched and funded with token.

Connection to the DON network

The Requesting Contract establishes a connection with the Decentralized Oracle Network, and DON takes over with its request allocation and data retrieval process, providing the requested data.

If you are for Blockchain Oracle solution for your blockchain protocol, Defi application, or any smart-contract based application, please connect to our experts.

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What is Chainlink VRF

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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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