We’re going to dive into the importance of decentralized oracle networks, why they matter, and potential use cases for them.
What is a decentralized oracle network? (in layman’s terms)
A decentralized oracle network is essentially a middle man between the real world and the blockchain.
It is a group of dispersed nodes (oracles) who gather data from the real world, from multiple sources and add it onto the blockchain.
This data is aggregated and used to determine a final, true data point.
Here’s a nice diagram from https://chain.link/solutions:
Why is a decentralized oracle network important?
The whole point of blockchains is to be decentralized so that there is not a single entity that can control it.
But, for blockchains to be useful in the real world, they need to be able to access and interact with the real world (smart contracts are going to be a real big thing).
If you were only to pull data from one source, you defeat the purpose of a decentralized application, because you now have a single point of failure that can break, be hacked, be manipulated, and you miss the whole advantage to smart contracts and blockchain technology.
Instead, a decentralized oracle network has multiple oracles that pull data from multiple sources. This data is then aggregated and you have your one final, true piece of data that will be added to the blockchain.
A Simple Hybrid Smart Contract Example
Let’s say Sally and Billy are going to make a bet on whether it rains this week in Seattle, WA. The winner of the bet gets $50. Sally says it will rain and Billy says it won’t.
They each put $50 into a smart contract and now need a reliable way to tell if it rains in Seattle.
This is where a decentralized oracle network, like Chainlink, comes into play.
Sally and Billy agree that 4 nodes will gather data from 4 different, reliable sources on the weather conditions in Seattle for the week. This data is aggregated and if it shows that it rained, Sally wins and the winnings are automatically added to her account.
A Real World Use Case for Decentralized Oracle Networks
Crop insurance for farmers in emerging markets
This is taken directly from Sergey Nazarov’s conversation with Lex Fridman on Lex’s podcast. The podcast is linked below. It is a fascinating listen all the way through, but the crop insurance piece starts at about the 55 min mark and goes for a few minutes.
My paraphrasing of Sergey:
“If I own a farm and it doesn’t rain, I get an insurance payout so I don’t have to close my farm.
Because if it didn’t rain, I don’t have crops.
People in the developed world can get crop insurance that will pay them out.
This allows people to smooth out risk.
This is actually how the global options markets were started.
They were initially about selling their produce ahead of time so that if there was a risk of drought, they weren’t impacted by it.
That’s were options trading came from.
In the emerging market, there are people, who if they don’t have rain for two seasons, they need to close down their farm and become a migrant worker of some kind.
And now, they have a $50 android phone where they can read Wikipedia, but they are still decades away from an insurance company coming to their geography and offering them insurance because their local legal system simply doesn’t allow that type of thing to exist.
No insurance company is coming to offer that insurance because of the levels of fraud that are dealt with in the local governments.
So, no people have to wait for decades to have this basic form of financial protection.
And with this technology they don’t.
If I have a $50 android phone and the smart contract has data about the satellites and weather conditions in the geography that my farm is in, I can put value in the smart contract and the smart contract will automatically pay me out of my andorid phone and I just leapfrogged past my curropt government not being able to provide a legal infrastructure to create insurance. I just leapfrogged dealing with insurance companies who will probably price gouge me and often not payout and I leapfrog into the world of hyper-reliable, guaranteed, smart contract outcomes that are as good and in many cases better than contracts that farmers throughout the world have.
And this type of dynamic in emerging markets as a way to control and manage risk in their economic life extends way past insurance. It extends to them having bank accounts to combat local inflation, it allows them to sell their goods on the global market without middlemen.
These are unbelievably impactful for people who don’t have a bank account and their inflation rate in their country is double digits, or their farm completely depends on rain, or their livelihood completely depends on their ability to sell goods and they can’t sell those goods because theirs a middle man who controls all the trust relationships.
55 Min mark of Lex Fridman Podcast
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