The Need for Oracles

In this document, we explore the importance of blockchain oracles

While the world we currently live in was built on the foundation of technology, there are only a handful of technological innovations that have managed to single-handedly change the way the world works. Blockchain technology, or distributed ledgers, are one of them.

After the initial revolution Bitcoin brought on by introducing a decentralized way to keep, measure, and transact value, there came a second transformation in the form of smart contracts.

The creation of Ethereum opened up a whole new world of applications for blockchain technology. With the ability to program the blockchain to perform actions far more complex than just sending funds, Ethereum enabled the creation of numerous DeFi applications.

And while having the ability to do essentially anything on the network was certainly a positive thing for the entire crypto industry, introducing decentralized applications opened up a Pandora’s box of problems regarding their operation.

The biggest problem blockchain networks face that is yet to be solved is the problem of trustlessly securing off-chain inputs. What this means is that, in order to work, smart contracts need to interact with the world outside of the blockchain they’re deployed on.

However, allowing smart contracts to take inputs from the outside world is a two-edged sword. While it essentially enables endless use cases for smart contracts, it also poses a huge structural risk to the network.

Smart contracts deployed on a permissionless network such as Ethereum are only executed when all of the network’s nodes can verify its transactions. If the nodes on the network cannot deterministically verify all external inputs that have gone into a smart contract, the smart contract wouldn’t be able to work.

This is where oracles come in.

Put simply, oracles are devices or entities that connect a blockchain network to the outside world. They enable smart contracts to access all kinds of off-chain information by entering every data input through an external transaction.

Off-chain data is a general term that envelops a wide variety of things—it could be anything from weather data used in decentralized trustless insurance to price feeds from crypto exchanges or news networks used in prediction markets.

But, introducing a single source for all real-world information fed to a smart contract is not only risky but diametrically opposite to everything blockchain technology stands for.

This is the source of the notorious oracle problem, a headache that’s been troubling the entire crypto industry for years.

Namely, importing data from a single source effectively destroys the purpose of blockchain technology, as it introduces a single point of failure to the network and puts it in the control of a single entity. Aside from being inherently opposed to the principles of blockchain, centralized oracles also pose a huge security risk as they’re prone to hacks and malfunctions.

The best way to solve the problem of single point of failure sources is the introduction of decentralized oracles.

Offering the best of both worlds, decentralized oracles remove the risk of centralization while providing blockchains with a connection to off-chain data.

Decentralized oracles are essentially a group of independent oracle nodes that feed off-chain data to a blockchain network. Each of the nodes in a decentralized oracle network retrieves data from an off-chain source independently. After each of the nodes feeds the retrieved data on-chain, the information is then aggregated in order to value the truth of that data point.

There is, however, a way to take decentralized oracles to the next level.

At its core, the oracle problem isn’t just a decentralization problem—it’s also a problem of ownership. Just like a malicious or malfunctioning oracle source can put a smart contract at serious risk, so can a malicious oracle provider. If the network nodes are all selected by a central authority, the network isn’t truly decentralized. The integrity of decentralized networks relies on its nodes being incentivized to accurately value data. However, if a node is fully and completely controlled by a central authority, the decentralization of the network is essentially nonexistent.

Therefore, a truly decentralized oracle network also must be community-owned.

The ideal way to ensure that oracle nodes operate independently and with integrity is by employing a consensus model. Umbrella is building a proof of stake consensus model (PoS), which allows holders of the native tokens of the network to pledge their tokens to validator nodes for consensus.

However, even the most robust decentralized oracle service cannot function without economic viability.

One of the ways Umbrella Network will achieve economic viability is by drastically reducing the cost of gas when compared to other oracle networks. Our Layer 2 solution does this by utilizing a system of Merkle Trees to bundle multiple transactions into a single node, effectively allowing each note to validate thousands of transactions for the price it would take to validate one transaction on other networks.

To create a network that’s not just economically viable and sustainable, but also resistant to manipulation and attacks, Umbrella has put control of the protocol in the hands of the community. No private investors or other shareholders will have control of the network—there are no pre-mined tokens and the community will own the majority of all publicly available tokens.