The decentralized finance (DeFi) industry represents the first large-scale adoption of hybrid smart contracts, which combine trust-minimized code on a blockchain with decentralized oracle networks (DONs) that provide access to external systems and real-world information in an equally secure, reliable way.
But what exactly is an oracle? Einstein is often noted for saying, “If you can’t explain it simply, you don’t understand it well enough.” During a fireside chat with Chainlink Co-founder Sergey Nazarov at last week’s Global DeFi Summit, Real Vision Crypto Editor Ash Bennington offered a simple framework for explaining oracles.
“When I explain oracles to my mother, I say that oracles are the things that fundamentally connect the blockchain to the real world.”
This simple definition of oracles is a good starting point, but it’s just a starting point.
Nazarov explained the evolution of oracles in several important stages.
In their simplest form, oracles are responsible for delivering data and transitioning information into another environment, such as a blockchain.
In more advanced forms, oracles are responsible for validating definitive truth, which exists on the spectrum between theoretical objective truth and personal subjective truth. As Nazarov explained during a recent episode of the Lex Fridman podcast, definitive truth (as it pertains to DeFi) is clearly established to serve the exact purpose of a hybrid smart contract that executes on specific conditions predetermined by and agreed upon by both counterparties.
For example, a DON creates definitive truth about the price of a particular asset by pulling price data from multiple sources and coming to consensus across a large group of independent node operators. Nazarov explained to Bennington that while the initial value of oracles is simply the provision of data, the more advanced value of oracles is the validation of that data in terms of definitive truth.
Oracles are currently advancing beyond the creation of definitive truth that’s capable of securing billions and eventually trillions of dollars in value to the ability to perform trust-minimized computation. This and other decentralized services are already powering more advanced hybrid smart contracts that are revolutionizing the insurance industry as well as gaming, global trade, ad networks and more.
The future is vast. As the world’s leading decentralized oracle service, the Chainlink network currently comprises hundreds of DONs providing the data, computation and verifiable random number generation required to build increasingly advanced hybrid smart contracts. As Nazarov explained using the flower patch analogy on an April episode of the Hidden Forces podcast, there is no foreseeable limit to the number of Chainlink DONs and their capacity to create a cryptographically guaranteed world.
Watch Sergey Nazarov’s fireside chat with Ash Bennington at the 2021 Global DeFi Summit.