The Oracle Problem refers to the problem that when you set up a smart contract so it relies on just one central oracle, you eliminated any benefits of decentralization. Since smart contracts and blockchain solutions revolve around decentralization, this is a serious concern.
To understand exactly what the Oracle Problem is and its relationship with smart contracts, you must understand each term separately. Oracles are data providers. They are what provides the smart contracts with answers to their queries about the world. Typically, a smart contract would not be able to get this information and execute or end the contract without information from an oracle.
The use of oracles allows smart contracts to execute autonomously and instantly. There are also various types of oracles, including outbound, inbound, consensus, software, and hardware oracles. Hardware oracles, for example, have sensors integrated into physical objects, like RFID tags that give data for supply chain tracking.
The most common type of oracle is a software oracle, finding data from third-party sources. Outbound oracles let the smart contracts send data to sources not in the blockchain network. Inbound oracles show the if-then scenarios of software oracles. Consensus oracles are the closest we have come to decentralized oracles.
A smart contract is a key piece of blockchain technology. These contracts execute automatically and are trustless without involving any third-parties. Compared to traditional contracts, they save time and money, offer security, and provide immutability.
With a better idea of the crucial role that oracles play in smart contracts, it is not hard to see why relying on any single oracle would lead to issues. After all, oracles have dramatic quantities of power when it comes to smart contracts. If any oracle becomes compromised, then the full contract would as well. This eliminates all the benefits of the contract related to security and trustlessness.
If you take a closer look at oracles, there are actually problems on multiple layers. The oracle layer tends to be centralized. This means that anyone with access to the layer could falsify input for any reason they want. There may also be centralized issues along the data layer, especially if the data is retrieved from a third-party source.
While many people are working toward resolutions to the Oracle Problem, others do not actually see it as a problem. Instead, they see it as a fact of smart contracts that must be understood and dealt with. It is just a fact that requires consideration.
Those who view it this way argue that at its core, the Oracle Problem just means that you will need to eventually trust an external source. Without that trust in some external source, smart contracts are impossible. They further argue that determining if an oracle is bad is relatively simple. If it is bad, this is an issue with your input source, not the smart contract itself.
A further point behind this philosophy is that even with the Oracle Problem in place, smart contracts provide numerous benefits. They can dramatically speed up the process of settling insurance claims. They will let you know in a clear manner what input was required to execute the smart contract. Furthermore, everything done by the oracle is tracked on the blockchain.
Thanks to the immutability of the blockchain, it becomes easier to identify bad oracles. If someone notices multiple bad inputs from an oracle, they can notify the community, which will then isolate it. It would also be possible to use the immutability of the blockchain to prove improper input via an oracle using our traditional legal system.
Even with some people following the above philosophy, the idea of the Oracle Problem is commonly accepted in the blockchain community. The obvious solution to the Oracle Problem would be to utilize a decentralized oracle instead of a centralized one. However, this is easier said than done, with multiple efforts made to achieve that goal.
One of the overall ideas is that of consensus oracles. These require the various members to agree on the information. The effects can be improved further by including an economic incentive for correct choices. An example would be losing stakes when they provide information that contrasts with that of the crowd.
Augur, for example, created an intricate model that lets token holders vote on what is true. The other token holders are then able to dispute the vote results. The model still has areas in need of improvement, but it does tend to reliably lead to truthful outputs for the oracle.
Another project is Gnosis. This project created generic oracle interfaces but has not resolved the problem itself. Instead, it says that the best answers at the moment are to use a centralized oracle or use what they call the “Ultimate Oracle.” This latter is an example of Rule by Wealth and far from perfect.
ChainLink is yet another solution, which uses a decentralized oracle network. The platform identifies the data before it triggers a smart contract. It also has a native token to provide compensation to oracle providers.
At the moment, anyone who utilizes a smart contract should keep the Oracle Problem in mind. This requires being cautious when selecting the source of your data input when triggering the smart contract. Ideally, you will want to avoid centralized oracles and use one of the decentralized models. Depending on the situation, however, awareness of the Oracle Problem and checking unexpected results may be enough.