Blockchains are inherently secure and anonymous. However, they need oracles to safely move data from the outside world.
The faster adoption of blockchain technology has led many games and applications to choose blockchain for their needs.
Blockchain oracles have often compromised blockchains, leading to hacks and the loss of millions of dollars. Let’s discuss some of these challenges and how we can overcome them.
What are Blockchain Oracles?
The main feature of a blockchain is decentralization. It works through a network of nodes that independently verify data. Each node is pre-programmed to be deterministic, which means that given the input data, each node will produce the same result.
Many of these blockchains have games or systems that need data from the outside world. Data that changes dynamically, such as a score in a baseball game. Even a one-second delay can produce different results from node to node. Blockchain oracles solve this problem.
Oracles act as a source of information exchange between the blockchain and the outside world. But most of these oracles are prone to security issues such as hacking, deprecation and many other attacks. In 2021 alone, hackers stole over $1.3 billion via oracle and bridge hacks.
Vulnerabilities and solutions
Oracles are critical to the success and mass adoption of blockchain technology. A Oracle exploit at Coinbase led to an $89 million liquidation in Compound.
We have identified a few intrinsic and extrinsic factors that could be responsible for many hacks and exploits in oracles. But also found projects that offer solutions to these vulnerabilities.
Intrinsic factors like centralization provide a golden opportunity for hackers who only need to crack one system to get through. Decentralized oracles have distributed networks running on multiple nodes. A different owner secures each node, and in case of false information, these nodes can be terminated. Nevertheless, there are decentralized oracles, like CQFD, which go even further. Each node must stake guarantees that the QED network reduces once false information is detected.
Malicious node operators
Internal mismanagement and malicious operators are very common phenomena in the blockchain. An oracle system operated by a single operator can become greedy and therefore provide false information to protect its interests. Such operators should be discouraged.
Unfortunately, many decentralized oracles do not penalize false information. They simply reduce their future orders or do nothing. QED has become a good deterrent against these malicious nodes by forcing them to stake coins and tokens as collateral for their work.
Oracles can be overwhelmed by the data they receive. If the amount of data requests becomes huge, the oracles can get overwhelmed. Decentralized nodes can expand endlessly as there are no restrictions on entrants as long as they have the requirements to run nodes and invest crypto for collateral.
With a market cap of over $10 billion, Chain link has proven that it can handle scaling without compromising anything vital. It also encourages other oracle networks, which is a win for the industry.
Operating completely in an online environment has its downsides. There is a constant threat of malicious attacks, hacks, exploits, DDoS attacks, Sybil attacks, etc. Even the main oracles have been compromised once or more. In the past year, since the start of 2021, more than $1.3 billion has been lost to hacks.
The Pirates attacked Chainlink to drive up gasoline prices. This resulted in a loss of almost 700 ETH, or nearly a quarter of a million dollars ($244,000). QED has never been hacked. It has delivered over 25 million data points to various blockchains.
Blockchain oracles are an essential part of the Web3 ecosystem. Security and authenticity are the main drivers of trust in the blockchain. Oracles can lead to increased public trust in blockchain if they work well. Oracles can achieve performance through innovation that drives oracles like QED to excellence.
Disclaimer: The information contained herein is provided without regard to your personal circumstances and should therefore not be construed as financial advice, investment recommendations or an offer or solicitation for trading in crypto- currencies.