In a time where misinformation is rising, how do we ensure the new web, blockchain, remains open, decentralised and most importantly, trustless? How does web 3.0 connect blockchains to the real world using trustless data?

The answer lies with oracles. It’s a key part of the blockchain infrastructure stack. It enables enclosed networks to communicate with external information. Without oracles, the blockchain is like computers without internet access. Without oracles, the blockchain may not achieve true decentralisation if it needs to rely on centralised data providers that could manipulate the real-world data.

The former Coinbase CTO Balaji Srinivasan said blockchain oracles are “going to be one of the most important technologies of this decade. In an era where anyone can disseminate anything as truth, the need for oracles becomes increasingly important as reliable arbiters of that truth.”

Oracles are the backbone for many parts of the blockchain, particularly for decentralised finance (DeFi) applications. This is because blockchains cannot access external data outside of their chains. DeFi applications rely heavily on oracle networks for real time, on chain and events-based data to ensure the applications run smoothly.

The blockchain could potentially interact with real-assets through oracle feeds from IoT sensors, and provide single source of truth asset monitoring and management. Combined with smart contracts that can bring increased automation, oracles can help the asset management industry to reduce systemic risk, lower costs and create highly transparent asset classes.

What are oracles?

Oracles take real-world information such as prices, exchange rates, location data and weather information from external sources and bring this data onto the blockchain. Non-blockchain oracles are usually a third-party service or an application a user interacts with themselves manually. These data providers are obviously centralised and make it easier to corrupt.

How do blockchain oracles fix the centralisation problem?

Blockchain oracles become decentralised by providing multiple reliable data sources to establish complete decentralisation. They do this by using cryptography and monetary incentives to create a system where nodes verify shared data. However, this isn’t completely bullet proof.

The common price feed oracle systems can still be manipulated and there have been numerous examples. One example being the DeFi protocol Compound where lenders lost US$100 million due to an oracle exploit. They also have limitations that restrict innovative DeFi applications. Oracles that feed prices onto the blockchain are required to have a constant price stream, which can be expensive over time and thus deter usage by small-cap cryptocurrencies.

As DeFi applications gain more traction, we will need new types of oracles that will allow for a wider range of use cases. One of them being optimistic oracles.

What are optimistic oracles?

Optimistic oracles run a priceless mechanism. It allows anyone to write an answer to a data request, with disputes raised if the data is incorrect. They provide a time window to dispute any incorrect findings, protecting users and smart contracts against bad actors manipulating external data feed. This feature for an oracle could allow applications to get accurate data at low cost.

 

Opportunities

Hatchstone is actively monitoring the developments in web 3.0 integration with real world assets, and investing in selected opportunities with high growth potential. If you are interested in web 3.0 or would like to discuss any opportunities with our team, please reach out to us at contact@hatchstone.com