The Blockchain Oracle problem: How AI Can Bridge the Gap Between On-Chain and Off-Chain Data

Aug 19-2024
The image appears to depict a stylized digital or blockchain concept, with interconnected cubes and glowing lines, often representing the flow of data or transactions in a blockchain network.

The global market for IoT (Internet of Things) devices, which can function as hardware oracles, was valued at $300 billion in 2023 and is projected to exceed $1 trillion by 2030. Approximately 20% of smart contracts rely on real-time data from software oracles to perform their functions. One of the most significant challenges facing the rapidly evolving blockchain network is the Oracle Problem. This problem centers on the difficulty of using and accessing off-chain data for on-chain applications within blockchain networks. Understanding oracles, their various types, and their role in Web3 API development is essential to addressing this issue and finding solutions.

What is the Blockchain Oracle Problem?

The image you uploaded titled "Artboard 1 (48).jpg" visually represents a blockchain architecture. It illustrates how various data sources such as AI analytics, IoT data, market data, and web APIs are funneled through oracles (multiple and single) into the blockchain. The blockchain then interacts with decentralized applications (DApps), indicated as "DApp1," "DApp2," etc.This diagram highlights the integration of different data sources into blockchain technology, showcasing how they can be used to support and run various decentralized applications.

Smart contracts on blockchain technology operate in a closed environment without direct access to outside data. This confinement hampers their ability to respond to current events or integrate real-time data into their operations. Imagine a blockchain application functioning independently but blind to external events, like a hermit in a quiet cave. Oracles act as messengers for these systems, providing an oracle service that sends data from the outside world to the blockchain, such as the latest weather updates or news.

In other words, oracles link blockchain applications to actual data, including anything from stock prices to weather forecasts. With this data, these programs can make more informed decisions. For instance, an insurance policy might automatically payout if an oracle identifies a storm. However, relying on a single oracle service introduces a single point of failure, affecting the trust model of the blockchain network. Oracles bridge the gap between blockchain applications and the outside world, creating opportunities for new applications like cross-chain capabilities, automated trading, or real-world game features.

Types of Oracles Technology

 visually represents the six types of blockchain oracles. Each oracle type is depicted with a corresponding label. The types include:Hardware Based Software Based Inbound Outbound Centralized Decentralized.These types of oracles are crucial for enabling blockchain networks to interact with external data sources and systems. Each type serves a specific function, helping to bridge the gap between blockchain technology and real-world data inputs and outputs.

There are several types of oracles, each serving specific functions within the blockchain ecosystem:

  • Software Oracles: Databases and web pages on the internet are the sources of data that software Oracles retrieve. This data includes social media trends, market prices, and weather forecasts. For instance, a smart contract may require real-time stock values for automated trading. Messengers in the form of software oracles retrieve this information for the blockchain.
  • Companies using software oracles include Chainlink, API3, Band Protocol, and Witnet.

  • Hardware Oracles: Blockchains are immediately accessed by real-world devices through hardware oracles. These gadgets, which include cameras and sensors, can monitor tangible objects. Consider a smart contract that automatically waters plants in response to soil moisture levels. Sensors on hardware oracles would measure the moisture content of the soil and transmit that data to the smart contract.
  • Companies using hardware oracles Include Thales, Quantstamp, and Pocket Network.

  • Consensus Oracles: After confirming the accuracy of the data, consensus Oracles compile it from several sources and post it to the blockchain. This, along with receiving numerous peers' same exam answers, enhances the reliability of the material.
  • Companies using consensus oracles include Chainlink, Band Protocol, and The Graph.

  • Inbound Oracles: Inbound oracles offer blockchains with external data, such as airfare or weather information, that smart contracts can use. This enables real-time information-driven actions using smart contracts. Examples of companies using inbound oracles are Ocean Protocol and DIA.
  • Outbound Oracles: Outbound oracles gather data from the blockchain for external use. This enables decentralized applications (dApps) to interact with data stored on the blockchain. Companies using outbound oracles include Chainlink, Band Protocol, and Pyth Network.

The Role of Decentralized Oracle in Web3 API Development

Blockchains are inherently tamper-proof and secure, but this security restricts their direct interaction with external data sources. Web3 APIs facilitate communication between dApps and blockchains. Decentralized oracles act as bridges, connecting blockchain-based applications to external data sources when the blockchain requires such data.

How Oracles in Web3 Work: A Framework

  • Data Fetching Consider that a dApp needs the weather forecast. It requests a Web3 API to retrieve this data, and the API forwards the request to an Oracle with the necessary data included. Oracles retrieve this data using various methods, such as dedicated connections for real-time data or web requests.
  • Data Validation and Verification To ensure the accuracy of the fetched data, oracles act like detectives, verifying the information comes from reliable sources. This might involve special codes or confirmation from other oracles.

  • On-Chain Transmission Once verified, the Oracle sends the data back to the dApp through the Web3 API, ensuring a secure delivery process.
  • Smart Contract Execution: The dApp can then trigger actions based on contract conditions using the received data. For example, a news app might trigger an update based on a confirmed news article.

  • Continuous Monitoring Oracles constantly seek new information to ensure smart contracts have the latest data, preventing reliance on outdated information.

Examples of Oracle Solutions in Web3 API

A 3D illustration titled "Data Stream" shows multiple interconnected components, representing a data flow system. Two central tall buildings labeled "Data DON" and "Automation DON" are connected to a "Data Provider" at the top. These buildings are linked to a "Verify Contract" on the right and a "DApp" on the bottom left, representing the distribution of data across different components in a decentralized network. The image emphasizes the flow and verification of data within a blockchain or decentralized application (dApp) ecosystem.
  • Chainlink: Chainlink is a well-known provider of strong decentralization, security, and adaptability Oracle solutions for a range of applications. Its decentralized network of node operators guarantees data integrity and decreases manipulation risk.
    • Strengths:

    • Decentralization
    • Security
    • Flexibility
    • Use Cases:
      • Decentralized Finance (DeFi)
      • Supply Chain Management
    • Band Protocol: Band Protocol is recognized for its scalability and interoperability. It facilitates efficient data delivery for smart contracts at scale and allows developers to access data from multiple blockchains seamlessly.
      Strengths:
      • Scalability
      • Interoperability
      • Ease of Integration
    • Use Cases:
      • Gaming and NFTs
      • Decentralized Marketplaces
    • Witnet Witnet prioritizes data confidentiality and minimizes reliance on trusted third parties, making it ideal for applications requiring privacy.
      Strengths:
      • Privacy
      • Trust Minimization
      • Transparency
    • Use Cases:
      • Identity Verification
      • Healthcare and IoT
    • WeatherXM WeatherXM provides off-chain weather data, supporting applications requiring real-time weather information.

Conclusion

Although the Oracle Problem is a significant obstacle for blockchain technology, Oracle development is helping to close the gap between off-chain and on-chain data. Knowing the different kinds of oracles and how they are used in Web3 API development reveals that these instruments are essential to creating decentralized applications and smart contracts. Combining AI and oracles will surely open up new opportunities and spur innovation across various industries as blockchain technology develops.

About Author

Rubiya Naveed

Rubiya is a seasoned content writer at Vanar, a pioneering Layer 1 blockchain company. With a passion for cutting-edge technologies and industries, Rubiya brings a wealth of experience and enthusiasm to her role. At Vanar, she specializes in crafting insightful and engaging blockchain blogs, helping to demystify the complexities of blockchain technology for a diverse audience. Her expertise extends beyond the technical aspects, weaving in creativity to make the content not only informative but also compelling.