Decentralized blockchain platforms, and by extension, smart contracts, are fundamentally altering the way transactions are done. The new technology has the potential to disrupt many sectors by removing the intermediary and allowing the automated implementation of contract conditions based on preset criteria. The past year has seen blockchain and crypto explode into the mainstream. What was once seen as a tree that would bear no fruit has now minted millionaires. Decentralized finance (Defi) in particular has brought with it new competitors all looking to streamline transactions and increase efficiency through the use of smart contracts.
The key aspect of smart contracts is that they reduce the costs and improve the efficiency of many different businesses. They are successful at minimizing counterparty risk while also providing transparency since they use blockchain technology to eliminate the intermediary. Additionally, smart contracts may be utilized in the preservation of records, the settlement of transactions, the conduct of clinical trials, the implementation of supply chains, the sale of real estate, and governance, among other areas. Despite all of these benefits, to some extent smart contracts are inefficient.
The Smart Contract Problem
Notably, smart contracts are unable to integrate with or export data to any other system. For instance, a financial smart contract would depend on market information in order to calculate the amount of money each party would get. In order for it to be implemented, it needs documentation and digital signatures. Smart contracts cannot use conventional services to gain information and ensure that the requirements of the contracts have been met nor can they automatically produce the information required. To counteract this problem, ‘oracles’ are a technology developed to allow smart contracts to integrate with real-world data. They have the ability to verify the veracity of information.
The solution also comes with its own attached problems. Bringing in oracles into blockchain transactions violates a fundamental use of the blockchain which is to ensure that transactions remain trustless without the influence of third parties. Oracles are third parties and introducing them to transactions could potentially open up what was previously a straightforward transaction to external influence. The validity of the oracle could always be in question and this over time removes the trustless nature of blockchain effectively invalidating the whole system.
