Why Oracles are key to blockchain adoption
Introduction
Quite simply, without oracles, blockchains would be like computers without access to the internet.
A blockchain oracle can be defined as follows; “Blockchain oracles are third-party services that provide smart contracts with external information. They serve as bridges between blockchains and the outside world.”
The oracle’s primary purpose is to enable smart contracts to operate beyond their native blockchain environment and to access data and information from external information sources for the purposes of executing (or not executing) a smart contract.
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In isolation, blockchains are very secure due to their mathematical cryptography and consensus algorithms. When oracles are involved, the potential for the introduction of compromised data becomes a potentially serious threat to the integrity of the blockchain (eg. man-in-the-middle attacks). If the data that the oracle is relaying to the smart contract is compromised, the smart contract relying on its data will also be compromised. This is commonly referred to as the Oracle Problem[1].
Oracles provide another important service. Blockchain data is defined as deterministic[2] whereas outside world data is typically non-deterministic. Blockchains therefore require a unique method to query and retrieve data from the outside world. Hence, oracles also act as a form of “translator” of information when provided to the blockchain.
Total Value Secured (TVS)
The importance of oracles and their level of adoption can be measured in terms of Total Value Secured (TVS).
“TVS is a powerful metric in measuring the adoption of oracle networks because it shows exactly how much value is being directly secured by the inputs provided by oracles.”
Oracles occupy a key role in securing “value” based upon their ability to perform their function with security, accuracy and integrity. The corruption of which could compromise the operation of smart contracts and cause a loss of “secured” funds.
Oracle Market Size
An industry leading oracle platform by the name of Chainlink currently has a TVS of $75 billion. This was the result of a 10-fold increase over less than a 12-month period in 2021. Current market indicators are that TVS will continue to surge as blockchain and oracle adoption continues to grow.
What is the economic problem being addressed?
At its simplest, the economic problem involves the process of deciding how to make the best use of scarce or limited resources.
Investopedia goes on the establish that “scarcity is the foundation of the essential problem of economics: the allocation of limited means to fulfill unlimited wants and needs.”
From the perspective of a blockchain oracle;
Oracle Economic Problem
How can an oracle update smart contracts and therefore blockchain ledgers with security, accuracy and integrity[3] with off-chain data in a cost-effective way so as to minimise transaction costs for users and avoid a potential loss of value?
Smart contracts routinely deal with transfers of value, transfers of (digital) property and their associated property rights. Therefore, oracles need to be trusted in order for smart contracts to operate successfully and as intended.
One of the most important functions of an oracle is to maintain data security, accuracy and integrity when receiving or retrieving data from sources external to the blockchain. Otherwise the trust and integrity of smart contracts and the blockchain could be compromised. Oracles need to perform their function whilst also being affordable and cost-effective in their operation (ie low transaction costs) so that users can afford to use their services in a cost-effective manner.
For the perspective of the oracle service provider there are costs associated with providing data via an oracle. These include ensuring that the data is up-to-date, secure, accurate and of high integrity to ensure that trust has been maintained. Each of these criteria come with a “cost” associated with ensuring this.
Oracle service providers derive economic rents from providing services which are secure, accurate and of high integrity to their users.
Alternatively, the oracle user must weigh carefully the fees being charged for oracle services and determine if these costs are less than the risks or potential losses associated with insecure, inaccurate and low integrity oracle data.
Establishing Oracle Trust
There are multiple causes of potential oracle breaches including malicious data hacks, data inaccuracies or data errors. Oracles can secure data via advanced cryptographic techniques, secure Application Programming Interfaces (APIs) and other encryption services.
Oracle service providers can also choose to provide insurance to its users to cover financial costs associated with oracle data hacks, breaches or errors. This can assist with establishing high levels of trust in the services provided by the oracle. This can be coupled with effective dispute resolution mechanisms.
The availability of such services may encourage users to more readily engage with oracle service providers.
Oracles and (Blockchain) Ledgers
“At their most fundamental level, ledgers map economic and social relationships.”
Remembering that blockchains are decentralised, digital ledgers which determine important events such as ownership, property rights, identity, status (citizenship), voting rights, authority, credentials and much more, the critical importance of secure, accurate and high integrity oracles becomes self-evident.
Do Oracle business models offer viable and profitable solutions to the economic problem?
In order for an oracle service provider to be viable and profitable, it will require the following key components:
· a large network of users
· ongoing, repeatable revenue stream of fees
· a range of fee and subscription-based services
· a large number and range of secure APIs to enable a broad range of adoption from users and API data providers/partners
· a large and active developer community to support and develop new products based upon the oracle/API platform
· availability of dispute resolution services
· available of insurance services
· Oracles/APIs that are easy and simple to customise, deploy, maintain and use
As an example, these criteria have been applied to two (2) oracle service providers below:
1. Viability
RSK (RSK Infrastructure Framework — RIF)
“RSK adds value and functionality to the Bitcoin network by enabling smart contracts on top of Bitcoin.” RSK has built its services and product offerings on the Bitcoin blockchain. The Bitcoin blockchain is well known for its security and robustness.
“RIF Gateways provides a set of interoperability protocols designed to enable secure and tamper-proof interactions with the external world.”
RIF is designed to be integrated with third-party oracle services such as Chainlink[4].
· Number of APIs/connectors — they have a vibrant developer community of partners offering a broad range on APIs. (https://developers.rsk.co/solutions/)
· Number of Partnerships — they have a broad range of partners spanning integrators, consulting, solutions and education (https://blog.rsk.co/partners/)
· Range of Products/offerings;
- Data Service for accessing external-world data via pull and subscription models with the ability to include Service Level Agreements (SLA)
- Trigger allows users to configure what they want to listen to, what actions to take and can choose from a range of pre-defined templates. Users can build triggers that suit their specific needs
- Scheduler allows users to access time-based functions such as transaction scheduling on a blockchain. Users can schedule future executions of on-chain transactions
· A dispute resolution service is available via Kleros[5] and can be added to SLA contracts. It is available with resolution options such as fee discount or penalisation fees
· Multiple payment models available to help reduce transaction costs and reduce barriers to entry
· RSK does not provide insurance services for its users
API3
API3 focuses on first-party API providers which are oracle services operated by the data providers themselves. API3 is based upon a Decentralised Autonomous Organisation (DAO) protocol.
· Number of APIs/connectors — Airnode will allow access to real-world data from more than 180 APIs.
· Number of Partnerships — Over the past few months, more than 150 data providers have joined the API3 Alliance
· Community of Developers — API3 Alliance (https://api3.org/alliance)
· Range of Products/offerings — API3 Airnodes[6] are easy to setup, maintain, require no specialised skillset to use. The data requester assumes all gas costs. “Light and robust middleware called Airnode has been created to make API3 a reality — and the distinctive qualities of this tool concern how it can be deployed in minutes, enhancing transparency and substantially reducing transaction fees in the process.”
· Pre-negotiated insurance is available via a staking pool
· A dispute resolution service is available via Kleros
· Risks — insurance claims could destabilise API3 in the event of multiple large claims. Also API3 is designed to be a DAO structure. This type of structure comes with its own forms of potential risk
2. Profitability
RSK
RSK could potentially generate revenue from the following two sources:
· Revenue from the Smart Contract processing fees: “The RSK Smart Protocol charges a small fee in RBTC as gas for processing and executing each Smart Contract deployed on the protocol.”
· Ecosystem Partnerships: “In connection with the promotional activities for the RIFOS ecosystem, RIF Labs plans to establish strategic partnerships in different parts of the world with start-up accelerators, incubators, education programme providers, event organisers, etc.”
RSK earn transaction fees from multiple sources. They offer products and services beyond data oracles.
API3
API3’s business model is not based on taking a “cut” from oracle/API transaction fees. Their business model is based upon deriving income from providing insurance services in the case of a breach by the oracle/API service providers.
Since API3 is not competing with first party oracle/API service providers for transaction fees, this has the ability to keep transaction fees lower. Importantly, API3 have designed their business model to ensure that first-party oracle providers have a vested economic and financial interest in encouraging API3 adoption and therefore its potential success.
Their business model also reduces the layers of third-parties and intermediaries by working directly with first-party oracles/APIs, as a result this has the ability to further reduce user transaction costs.
This type of business model requires specialised knowledge with regard to pricing insurance risk and defaults and as a result has the ability to significantly reduce API3s profitability. This will need to be managed carefully.
Profitability will also be driven by the number of API providers and the number of users requesting their services via API3.
Implications for blockchain technology
As more health-based services, social activities, political activities and economic decision-making moves online, the security, accuracy and integrity of digital platforms becomes ever more important. This includes blockchain platforms.
Oracles are integral to the continued expansion and adoption of blockchain networks as they are instrumental in providing smart contracts with the secure, accurate and high integrity data that they need to successfully operate, whilst maintaining the security and integrity of blockchains. Without oracles, blockchains would become “islands” on their own, unable to communicate or interact with the outside world.
Oracles can enable wide-spread adoption of blockchains and smart contracts as they will have greater application to solving real-world problems
“Today, oracles are provided in many different ways (e.g., degree of decentralization) and with corresponding features (e.g., robustness, reliability, accuracy, integrity). These features are important because even where a particular blockchain protocol is considered secure, oracles can be points of weakness for smart contracts (e.g., inaccurate or compromised data).”
When it comes to allocating limited and scarce resources, blockchains provide a unique mechanism for the co-ordination of economic activities in a decentralised manner. Blockchains have the ability to co-ordinate decisions across a decentralised landscape of decision makers and to co-ordinate their efforts via a consensus algorithm to create a single version of the truth and determine an outcome. This process is assisted by the use of smart contracts and oracles.
In their article entitled “The Blockchain and Increasing Cooperative Efficacy”, Malavika Nair et al (2018) establish that blockchains have the ability to increase “cooperative efficiency[7]” significantly.
The new blockchain-based economic institutions are discrete and unique from centralised organisations/firms, marketplaces and government agencies. Sinclair Davidson describes blockchains “as a new type of economy: a spontaneous organisation, which is a self-governing organisation with the coordination properties of a market”.
Sinclair Davidson et al assert that “blockchain is actually a new way of coordinating economic activity. That is, this technology is a new type of economic institution.”
As a result of their unique architecture, blockchains, smart contracts and oracles have the ability to be highly disruptive in finance (DeFi), social (carbon credits, energy sector, water rights) and political (voting, democratic processes, policy monitoring, legal processes) sectors. The full impact of their capabilities is yet to be felt.
Conclusion
Oracles are instrumental to the success and broad adoption of blockchain technology. They are the bridge between blockchains and the external world. As a result, it is critical that they are secure, accurate and have high levels of data integrity. Oracles are critical in securing value stored in smart contracts (TVS). Corruption of the oracle and its function would cause a loss of secured funds.
As blockchain adoption continues, oracles will be a key ingredient to ensuring their success in enabling blockchains to solve real-world problems. Their full disruptive impact will be felt in the coming years.
[1] “The oracle problem refers to inefficiencies regarding the introduction of external data to isolated blockchain systems. Data oracles exist to bring reliable off-chain data to internal, on-chain environments.” (Cryptopedia, n.d.)
[2] “The term Determinism in Computer Science refers to a system where the future state of the system is entirely determined by the prior state. Determinism means that we reach exactly the same state like everybody else if we enact the same operational steps in the same order.” (Maler, 2021)
[3] Integrity in this context is defined to be that information or data provided to the oracle is authentic and has originated from a trusted source and is free of errors. In addition, the data has not been tampered with either through malice or error.
[4] Chainlink is designed to be a decentralized oracle network (DON). “This is a group of independent blockchain oracles that provide data to a blockchain. Every independent node or oracle in the decentralized oracle network independently retrieves data from an off-chain source and brings it on-chain. The data is then aggregated so the system can come to a deterministic value of truth for that data point.” (Collins, 2020)
[5] “Kleros is an open-source online dispute resolution protocol which uses blockchain and crowdsourcing to fairly adjudicate disputes.” (Kleros, n.d.)
[6] “An Airnode is a fully-serverless oracle node that is designed specifically for API providers to operate their own oracles.” (Benligiray et al. p.13)
[7] “Cooperative efficacy involves a communities or group’s ability to engage in collective action.” (Nair, Sutter, 2018, p. 531)
Nathan van den Bosch is a Behavioural Economist, Tokenomics Specialist and Blockchain Strategist, with more than 30 years of experience in emerging and disruptive technologies. Nathan has degrees in Economics, Commerce, Behavioural Economics and Applied Blockchain.
Nathan specialises in designing the reward and incentive schemas for gamified metaverses, digital ecosystems and digital economies. His focus is based upon understanding the behavioural drivers that spur adoption and sustained usage in blockchain-based network environments.
