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What is an Oracle?
Blockchain oracles are entities that connect blockchains to external systems, thereby enabling smart contracts to execute based on inputs and outputs from the real world.
Oracles provide a way for the decentralized Web3 ecosystem to access existing data sources, legacy systems, and advanced computations. Decentralized oracle networks (DONs) enable the creation of hybrid smart contracts, where on-chain code and off-chain infrastructure are combined to support advanced decentralized applications (dApps) that react to real-world events and interoperate with traditional systems.
For example, let’s assume Alice and Bob want to bet on the outcome of a sports match. Alice bets $20 on team A and Bob bets $20 on team B, with the $40 total held in escrow by a smart contract. When the game ends, how does the smart contract know whether to release the funds to Alice or Bob? The answer is it requires an oracle mechanism to fetch accurate match outcomes off-chain and deliver them to the blockchain in a secure and reliable manner.
Why use a decentralised oracle instead of a centralized oracle?
Blockchain oracle mechanisms using a centralized entity to deliver data to a smart contract introduce a single point of failure, defeating the entire purpose of a decentralized blockchain application. If the single oracle goes offline, then the smart contract will not have access to the data required for execution or will execute improperly based on stale data. ‍ Even worse, if the single oracle is corrupted, then the data being delivered on-chain may be highly incorrect and lead to smart contracts executing very wrong outcomes. This is commonly referred to as the “garbage in, garbage out” problem where bad inputs lead to bad outputs. Additionally, because blockchain transactions are automated and immutable, a smart contract outcome based on inaccurate data cannot be reversed, meaning user funds can be permanently lost. Therefore, centralized oracles are a non-starter for smart contract applications.
Genuinely overcoming the oracle problem necessitates decentralized oracles to prevent data manipulation, inaccuracy, and downtime. A Decentralized Oracle Network, or DON for short, combines multiple independent oracle node operators and reliable data sources to establish end-to-end decentralization.
Why does Sumero need a decentralised oracle to function?
In order to preserve all the benefits that cryptocurrency provides, Sumero needs a system that can input pricing data onto the blockchain without needing to rely on a trusted third party. To achieve this, Sumero would need to use a system that is based on an open non-cooperative bargaining game. Much like incentives are created for miners or validators to come to a consensus on the order of transactions on a blockchain, Sumero requires an incentive system that encourages people to come to a consensus on the correct price of an asset. Those that attempt to input incorrect prices face similar financial penalties to those that attempt to re-order transactions. Honest behaviour is rewarded and dishonest behaviour is punished. Consequently, decentralised oracle systems are an essential foundational technology in bringing derivatives of real-world assets to the blockchain.