There has to be some external connectivity to communicate with external systems. With this, smart contracts can communicate internally. It is just like a computer that is without the Internet and cannot connect with the real world; similarly, a smart contract is extremely limited without real-world connectivity.
Due to their vulnerabilities in them, hackers get the chance to turn them into expensive exploits. Thus, it is advised to rely upon the best smart contract auditing company for eliminating security flaws that can cause potential loss of funds.
This blog will focus on Ethereum contracts to see how they can communicate with an external data source.
Ethereum virtual state machines aren’t suitable for communicating with the outside world in an easy manner. Why?
This is because there is a condition that says all the mining nodes should receive similar results from outside. Only then each block-chain BLOCK validity will be approved. Let us see how this can happen.
If you wish to use this method, you must first trust a third-party solution like Oraclize.
This isn’t a free service, and you need to pay them for wherever they are doing. The usage is quite simple, and here is an example:
Advantages of Pull way:
- In this method, you don’t need to think about implementation. It is easy and fast to use.
- The cost is fixed.
- Gas spending will be the same.
Disadvantages of Pull way:
- The oracle query cannot reach anywhere other than this public API–it means no data security
- Every data that is published to the Ethereum blockchain becomes instantly public.
- It becomes a matter of concern if you are working with sensitive data and don’t want to give the public access to your API.
The push-way method has several pros and cons. These benefits are
The Pros of push way:
- For calculation logic, you only need open up data.
- You can control all processes with no third-party components.
- It is easier to track communication issues and response statuses.
The cons of push way:
- It is a bit of a complex process to implement and test it.
- You will require Custom development and hosting for “Custom Executor.”
In both methods we have discussed, your smart contract will trust an external wallet address. However, in the latter one, you decide how to manage the security and balance this address.
What Connects Smart Contracts To External Data Sources?
Some entities are responsible for connecting blockchains to external systems. This way, smart contracts depend on real-world inputs and outputs. These are known as oracles. They offer the Web 3.0 ecosystem a way to connect to existing systems, data sources, and advanced calculations.
Decentralized oracle networks (DONs) help implement hybrid smart contracts, wherein both off-chain infrastructure and on-chain code provide dApps that respond to real-world events and communicate with the existing systems.
The blockchain community must interact with the real world. We must enter the price of Ether (ETH) and other cryptocurrencies into a contract in order to have DeFi. To provide decentralized, trustless insurance, we need meteorological data. We need data to use blockchain for smart contracts, one of its most important applications. How, then, do we connect the worlds under this restriction?
The answer lies in the Blockchain oracle.
What Is A Blockchain Oracle?
These entities are responsible for connecting blockchains to external systems. The smart contracts then respond to the inputs and outputs that they get from the real world.
Decentralized oracle networks (DONs) help create hybrid smart contracts that combine on-chain code and off-chain infrastructure. This supports dApps that react to events in the real world and also interoperate with conventional systems.
What about the Oracle Problem?
The blockchain oracle problem highlights one of the fundamental limitations of smart contracts. It states that smart contracts cannot interact with data and systems that lie outside their native blockchain environment. Those resources found external to the blockchain are known as “off-chain,” while the data stored on the blockchain is known as “on-chain.”
Blockchains obtain essential properties like mitigation of network downtime, strong consensus on the validity of user transactions, and prevention of double-spending attacks by isolating themselves purposely from external systems. Oracle solves the problem of bridging the gap between the two environments.
Oracles offer a universal gateway to off-chain resources, keeping the security properties of blockchain intact. The oracle mechanism needs to be accurate, as the data that oracle delivers to blockchains decides the outcomes of smart contracts.
The Bottom Line:
As discussed in the blog, a smart contract can only communicate externally when blockchain entities like oracles connect them with external systems. Only then can it respond to real-world inputs and outputs.