The Oracle problem is a limitation of smart contracts: they cannot access data not located within the blockchain, such as external data. This isolation of a blockchain is what enables a smart contract to be secure, yet it also hinders its abilities. This is where oracles come in, they provide the off-chain data needed for smart contracts to work, yet there are still some problems with oracles.
These problems revolve around three major aspects:
- Correctness: The data that the oracle provides must be authentic. This means that the data comes from a proper source. The data must also have integrity, meaning that it wasn’t altered or changed. Overall, the data provided by the oracle must be “correct.”
- Availability: Thinking in terms of scalability, the oracle should be able to retrieve the data nearly instantaneously. Otherwise, the smart contract that the Oracle provides data to would not be able to execute instantly and change states.
- Incentive Compatibility: The Oracle must incentivize the data providers to give correct data rather than incorrect data. To do this, the oracle must be able to incorporate accountability and attributeability. This means that the data providers must be linked to the information they provide so that they are “rewarded or penalized based on the quality of the information” they provide.
The oracle must be able to apply all these components in its application, while still being scalable and trustless. In terms of scalability, another question arises: whether to use a centralized or decentralized oracle. While a centralized oracle can offer far greater efficiency, a decentralized oracle will be far better, as an oracle must be impervious to hacks, DDOS attacks, bribes, etc. Furthermore, a decentralized oracle better matches the blockchain itself, yet it will work differently and answer different questions.
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