What is Blockchain Oracle Problem and how Chainlink solves it?

What is Blockchain Oracle Problem and how Chainlink
solves it?

leewayhertz.com/chainlink-solving-blockchain-oracle-problem

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.

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.

1/5

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.

2/5

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

3/5

a “middleware” jeopardized of a decentralized oracle platform. Crucially, ChainLink
identifies and authenticates data before it becomes a trigger for a smart contract.

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.

4/5

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.

5/5