2020 is credited as the year when DeFi took the world by storm. The lockdown, coupled with sky-high inflation, meant many people were quick to adopt this decentralised and transparent mode of finance. By the end of the year, NFTs, DeFi and cryptocurrencies had become commonplace in almost every discussion. But is that all blockchains are capable of?
With the rise of oracle networks that facilitate the transfer of real-world data on-chain, people are discovering that blockchain technology can be leveraged in several other industries like healthcare, supply chain management, insurance and more. In the panel below, our speakers share their views on decentralised technologies and their impact beyond the financial sector. They also discuss the oracle problem and the advantages and disadvantages of decentralising real world industries with smart contracts and oracles.
Before diving into the panel discussion, here are some key concepts to note.
Decentralising Real World Industries Decentralisation is a core concept that is closely linked to public blockchain technology. A decentralised system is one in which power and control is distributed across a network of participants, rather than being concentrated in the hands of a single central authority. Decentralisation is achieved through the use of cryptographic algorithms that allow transactions to be verified and processed by the network as a whole, rather than relying on a single trusted third party. In the case of public blockchains, decentralisation is achieved through the use of consensus algorithms that ensure that all participants (nodes) agree on the state (balances & transactions) of the ledger.
Undoubtedly, many industries could potentially benefit from adopting decentralised blockchain technology, such as healthcare, supply chains, government etc. However, in order to do so, there is a need for new sets of data not found on-chain. The technology that helps bridge real-world data with on-chain environments is called an oracle. Oracle networks like Tellor and Goracle provide a way for otherwise siloed blockchains to interact with off-chain data such as healthcare data and election reports and incorporate them into smart contracts.
In the healthcare industry, for example, there are constant concerns about data privacy and sharing. The blockchain could create a safe medium to share medical data globally without revealing patients’ identities. It would also put the patient in control of who has access to that data. In addition, decentralisation could impact this sector in drug supply tracing, counterfeit prevention, healthcare insurance, bill payments and much more.
Governmental elections could also benefit from the security of the blockchain. The transparency provided by the network ensures that data cannot be falsified, while immutability could mean an end to voter fraud. In addition, users retain their anonymity, and voting data obtained from oracles can be used in prediction markets. In order for this to work, however, a robust mechanism to ensure individuals’ identities on the blockchain needs to be developed in conjunction with governments and election officials.
Real estate, transportation, cyber-security, law enforcement … The list goes on and on. Moving real-world industries on-chain could bring the much-needed transparency and traceability that these sectors need. It also reduces the reliance on intermediaries.
However, some on-chain networks have centralised aspects, and these issues must be addressed before blockchain adoption can become mainstream and truly beneficial in these real-world industries.
The Oracle Problemin RWAs In order for a blockchain to be useful for real-world applications, it needs access to data from the outside world, such as stock prices, weather conditions, or shipping information. This means that the data they provide must be accurate and trustworthy.
This is particularly challenging when dealing with RWAs. For example, if a smart contract is programmed to trigger a payment once a package arrives at its destination, the system would be vulnerable to corruption and manipulation. If the payment for a particular package (or group of packages) is high enough, bad actors would be incentivised to deceive the smart contract in order to manipulate the outcome.
In this example, if the package’s arrival is recorded by a sensor or NFC, the sensors used would have to be as immutable as the blockchain itself, if not a centralised intermediary that can process refunds might be a desired step for end-users.
This is an example of the oracle problem in blockchain, which refers to the challenge of connecting public blockchains with real-world data and events. Since blockchains operate in decentralised, trustless environments, they cannot rely on any single source of information. This creates a challenge known as the “oracle problem”: How can the blockchain securely and accurately access external data? If trust in oracles is required, are blockchains truly trustless?
In an attempt to solve this problem, decentralised oracle networks allow multiple oracles to contribute data, with consensus mechanisms being used to aggregate the results and arrive at a single, agreed-upon value. This helps to improve the accuracy and reliability of the data being sent to the blockchain.
There are three criteria for evaluating an oracle network. They are correctness, availability and incentive compatibility. Correctness refers to the authenticity of the data and how the oracle guarantees the information was from valid sources and was unaltered before being brought on-chain. The feature of an oracle that allows smart contracts to execute without delay is its data availability. Lastly, oracle networks must have methods for user accountability and rewards or penalties depending on the accuracy of provided data.
While there are many approaches to solving the oracle problem, no network is 100% perfect. When attempting to move real-world industries onto the blockchain, each sector must consider the trade-offs of different networks and choose the most appropriate set of trade-offs based on each individual use case and priorities. This article goes into more detail on oracles and the different approaches to the oracle problem.
Layer 1 Blockchains Layer 1 blockchains or networks refer to the underlying network where the basic operations occur. They have their own consensus mechanism, security protocols, and transaction processing rules, and they form the foundation upon which other blockchain applications can be built. Examples of Layer 1 chains are Bitcoin and Ethereum.
In contrast, layer 2 blockchains are built on top of layer 1 blockchains and are designed to provide additional functionality and scalability without compromising overall network security. Examples of Layer 2 networks include Optimism and Arbitrum.
Multi-Signature Wallets In some oracle networks, multi-sigs are used to verify consensus across multiple nodes, in order to confirm that the data is, in fact, accurate. Unlike regular crypto wallets, multi-signature wallets (also known as multi-sigs) refer to cryptocurrency wallets which require more than one signature or private key to approve a transaction. They are useful in ensuring that certain transactions can only occur with the approval of the majority of the signers. Multi-signature wallets, therefore, have greater security and can better resist hacks caused by stolen private keys. While multi-sigs can provide greater transparency and prevent single points of failure, they still allow for important decisions to be made by a small handful of multi-sig signers. There is no 100% guarantee that these signers will not collude to sway any major decision or vote in their favour. This post from Binance Academy gives a more in-depth understanding of multi-sig wallets.
NFTs and Blockchain Traceability Non-fungible Tokens or NFTs refer to unique digital tokens on the blockchain often used to certify ownership. Unlike traditional currencies or cryptocurrencies, an NFT cannot simply be replicated. In some cases, physical items are “tokenised” as NFTs so that the owners can enjoy the security and immutability of the blockchain.
NFTs are excellent ownership-proofs because they are unique and traceable. Blockchain traceability allows users to trace the NFT from its creator to every subsequent buyer. This is because all network users have an immutable copy of the transactions, which shows clear evidence of who created the NFT and offers security in the form of a private key such that only the owner can authorise a transfer.
Many real-world industries could benefit from adopting NFTs.
How To Attach Physical Objects To The Blockchain Physical NFTs are helping to bridge real-world items to the blockchain. They enable many new applications, including event tickets and property deeds. To create physical NFTs, one must first issue a digital asset on a blockchain using smart contracts. After this, the physical asset is linked to a unique ID like a QR code which, when scanned, will connect automatically to the tokenised version of the item. Here are some examples of how top brands are using physical NFTs.
Moving real-world industries on-chain will help to prevent counterfeit fraud and verify ownership due to increased transparency and immutability. Also, fair pricing will be ensured through transparency of sale history and the removal of intermediary presence and fees.
Nicholas Fett, Co-founder/CTO, Tellor Nicholas Fett is the CTO of Tellor. Formerly an economist at the CFTC, EF Grantee, and CEO of Daxia, he specializes in applying game theory and economics to build and launch products that are truly decentralised and work to add value to communities. He also enjoys arm wrestling, scotch, prog metal, and foosball. Tellor Website Nicholas Fett Twitter
Andreas Dittrich, Managing Director, Finoa Consensus Services Dr. Andreas Dittrich is a computer scientist with a professional track record of 25 years in the IT industry. He worked in diverse roles as engineer, architect, consulting and management. His focus was on the security of service and cloud infrastructures. After several years in academia he started working for Deutsche Telekom (DT) where since 2019 he was heading the transformation of DT’s enterprise blockchain business to focus on supporting and promoting public blockchains. At the time of recording, Andreas was Managing Director at Finoa Consensus Services. He has since been promoted to CTO. Finoa Website Andreas Dittrich Twitter
Abdul Osman, Founder/CEO, Goracle Abdul has a background in both Business Administration and Computer Science. He’s helped high level executives plan and execute short and long term business strategies. Abdul has also been part of teams that have developed banking software used by millions of Canadians daily. He believes secure and fast Oracles are key to realizing the potential of blockchain applications. Goracle Website Abdul Osman Twitter
Saša Milić, Blockchain/Cryptography Researcher, Independent Saša is an independent researcher in the cryptography and blockchain space. She is one of the co-authors of the API3 whitepaper, and previously worked as a data scientist for Gauntlet Networks. She has an academic background in computer science and statistics. Saša Milić Twitter
The Blockchain Oracle Summit was the world’s first conference to focus solely on the important role of oracles in the wider blockchain ecosystem and their limitations. Leading speakers from across the world gathered in Berlin to share their work and experience building and using oracle solutions.