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Building Decentralized Oracles: A Comprehensive Guide for Developers

Karolina

01 Jun 2023
Building Decentralized Oracles: A Comprehensive Guide for Developers

In the realm of blockchain technology, decentralized oracles play a crucial role by facilitating secure and trustworthy connections between real-world data and blockchain networks. Acting as a conduit, these oracles enable the seamless integration of off-chain information into decentralized applications (DApps) and smart contracts. Utilizing such oracles allows developers to expand on the potential of blockchain technology by tapping into verifiable and resistant data from a variety of sources. We will delve into the complexities of constructing decentralized oracles in this guide, addressing their advantages, obstacles, recommended approaches, and available frameworks for crafting inventive blockchain solutions.

Table of Contents

Understanding Oracles in the Blockchain Context

Understanding Oracles

Specialized systems known as oracles facilitate the connection between blockchain networks and external data sources. Serving as intermediaries, they supply off-chain data to on-chain applications like smart contracts and DApps, allowing blockchain applications to access real-world information, events, and data feeds securely and reliably.

Types of Oracles

Centralized Oracles:

When it comes to providing data inputs for blockchains, centralized oracles depend on a single authority or entity. Though their implementation is relatively simple, they create a single point of failure and potential vulnerabilities, which can compromise the data's trustworthiness and security.

Decentralized Oracles:

In contrast, decentralized oracles use the principles of blockchain technology to offer a more secure and dependable method. They distribute the tasks of data retrieval, validation, and aggregation among multiple participants to ensure consensus while minimizing manipulation or tampering risks. Decentralized oracles enhance trust and verifiability in blockchain applications.

Decentralized oracles are prominent due to their capability to deliver reliable and tamper-proof data inputs that align with the core concepts of decentralization and trustlessness in blockchain technology. By comprehending the various oracle types and their implications, developers can make well-informed decisions when incorporating oracles into their blockchain endeavors.

Components of a Decentralized Oracle

A decentralized oracle is not a simple, single entity, but rather a combination of several components that work together to connect blockchain-based smart contracts with the external world. Understanding these components is vital for any developer who wishes to construct a decentralized oracle. Let's delve into the core components:

Oracle Node

Oracle nodes are the workhorses of a decentralized oracle network. They are responsible for retrieving and validating real-world data from external data sources. Oracle nodes are also responsible for reporting the retrieved data back to the blockchain. A decentralized oracle network includes multiple oracle nodes to ensure data accuracy and prevent manipulation.

Data Providers

Data providers are the external sources from which oracle nodes retrieve the necessary real-world information. They can be anything from APIs of web services, data feeds, databases, to IoT devices. The choice of data providers is critical as they directly affect the accuracy and reliability of the data used in smart contracts.

Aggregation Contract

Once oracle nodes retrieve and validate data, it must be processed and formatted in a way that's useful for the smart contract requesting the data. This is where the aggregation contract comes in. It takes the data from multiple oracle nodes, processes it (often by calculating a median or average), and then feeds the aggregated data to the requesting smart contract.

Reputation System

In a decentralized oracle network, a reputation system is typically used to incentivize honest behavior and discourage malicious activity. Oracle nodes are rewarded or penalized based on their performance. Nodes that consistently provide accurate and timely data are rewarded, while those found to be unreliable or dishonest are penalized.

Request and Response Model

The request and response model is a core component of how a decentralized oracle functions. When a smart contract needs data from the outside world, it sends a request to the oracle. The oracle nodes then fetch the required data from the chosen data providers, validate it, and send it back to the smart contract.

Security Mechanisms

Security is a paramount concern for any component interfacing with a blockchain. Decentralized oracles often incorporate various security measures to protect against attacks. These might include cryptographic proofs for data integrity, multi-signature confirmations for critical transactions, and secure data transmission protocols.

In summary, building a decentralized oracle involves constructing and connecting these components in a way that ensures the reliable, secure, and timely delivery of real-world data to smart contracts. Each component plays a crucial role in the overall functioning of the decentralized oracle. Understanding these components and their interactions is a prerequisite for creating a robust decentralized oracle.

Building a Decentralized Oracle - The Process

Creating a decentralized oracle is a challenging but rewarding process. It involves careful planning, thoughtful design, meticulous coding, rigorous testing, and effective deployment. Here is a step-by-step guide to building a decentralized oracle. 

Step 1: Setting up the Environment

The first step in building a decentralized oracle is setting up the development environment. This typically involves:

  • Choosing a blockchain platform: The choice of blockchain platform depends on various factors like the target audience, security requirements, scalability needs, and the type of data to be handled. Ethereum is a popular choice due to its extensive developer support and robust smart contract capabilities, but other platforms like Binance Smart Chain, Polkadot, or Cosmos might be more suitable depending on your specific needs.
  • Setting up the development tools: Depending on the chosen blockchain platform, you will need to install and configure the appropriate development tools. For Ethereum, this would include tools like Truffle, Ganache, and the Solidity programming language.

Step 2: Developing the Oracle Smart Contract

The next step is to write the oracle smart contract. This contract will handle requests from other contracts, fetch data from the external world, and return the retrieved data. This process involves:

  • Designing the contract: Before you start coding, you should design the contract's interface and determine how it will interact with other contracts and external data sources.
  • Writing the contract: Using your chosen programming language (such as Solidity for Ethereum), write the smart contract code. Be sure to follow best practices for security and efficiency.
  • Debugging: Debugging is a critical part of the development process. Test your contract thoroughly to ensure it behaves as expected and doesn't contain any vulnerabilities.

Step 3: Integrating Data Providers

Once your oracle smart contract is ready, you'll need to connect it to external data providers. This involves:

  • Selecting data providers: Choose reliable and accurate data providers that can supply the type of data you need. This could be anything from financial data feeds, weather APIs, IoT devices, or other web services.
  • Writing the integration code: Write the necessary code to fetch data from your chosen data providers and feed it into your oracle contract.

Step 4: Testing and Deploying the Oracle

The final step is to test your oracle thoroughly and then deploy it on your chosen blockchain. This includes:

  • Testing: Conduct thorough testing to ensure that your oracle works correctly and securely. This should include unit tests, integration tests, and stress tests. Consider using testing frameworks and tools to automate this process.
  • Deployment: Once you're confident that your oracle is ready, deploy it on the blockchain. Be sure to follow best practices for contract deployment, and consider using a deployment tool to make the process easier and more reliable.
  • Building a decentralized oracle is a complex but rewarding process. By following these steps, you'll be well on your way to creating a powerful tool that can bridge the gap between the blockchain and the outside world.

While it's entirely possible to build a decentralized oracle from scratch, leveraging existing oracle platforms can significantly ease the development process. These platforms offer tools, services, and frameworks that simplify the creation of secure, reliable, and efficient decentralized oracles. Let's explore some popular platforms:

Chainlink is one of the most well-known and widely used decentralized oracle platforms. It provides a flexible framework for connecting smart contracts with real-world data, APIs, and other off-chain resources. Developers can use Chainlink to create custom oracle networks, choose their own data sources, and define aggregation strategies.

Band Protocol

Band Protocol offers a decentralized data oracle that allows smart contracts to access external data in a secure and scalable manner. The Band Protocol is known for its efficient design, which reduces the amount of data stored on-chain, leading to faster transactions and lower costs.

Provable (formerly Oraclize)

Provable provides reliable oracle services for various blockchains, including Ethereum, Bitcoin, and EOS. It focuses on data transport, authenticity proofs, and easy integration. Provable's technology allows developers to fetch data from any web API, ensuring a wide range of potential use cases.

Challenges and Potential Solutions

Building decentralized oracles comes with a set of unique challenges. Here are some of the most common ones, along with potential solutions:

Data Accuracy and Reliability

Challenge: Ensuring the accuracy and reliability of data from external sources

Solution: Using multiple data sources for cross-verification and choosing reputable and reliable data providers. Implementing a consensus mechanism for data validation can also help.

Timeliness of Data

Challenge: Providing real-time or near-real-time data to smart contracts, as fetching data from external sources can introduce latency

Solution: Optimizing the data retrieval process, using fast and reliable data providers, and implementing predictive algorithms to anticipate future data needs.

Security

Challenge: Protecting against potential attacks such as man-in-the-middle attacks, Sybil attacks, or direct attacks on the data source

Solution: Implementing robust security measures like cryptographic proofs for data integrity, secure data transmission protocols, and utilizing additional security services from oracle platforms, if available.

Complexity of Development

Challenge: Navigating the complex process of building a decentralized oracle, which requires deep knowledge of blockchain technology and the specific oracle platform

Solution: Leveraging existing oracle platforms that offer tools and frameworks to simplify the development process, and utilizing educational resources and developer communities around these platforms.

Despite these challenges, with the right approach and tools, it's entirely possible to build effective and secure decentralized oracles to bridge the gap between blockchain networks and the real world.

Conclusion

Decentralized oracles play a crucial role in connecting blockchain networks with real-world data, facilitating secure and dependable interactions. By leveraging these oracles, developers can tap into verified data from diverse sources, extending blockchain technology's reach across numerous sectors. In this exhaustive guide, we have delved into the concept of oracles, making a distinction between centralized and decentralized varieties while shedding light on their advantages and drawbacks. Additionally, we have explored the fundamental elements of a decentralized oracle, the procedure for constructing one, and well-known platforms that streamline oracle development. Equipped with this information, developers can seamlessly incorporate decentralized oracles into their blockchain ventures, uncovering new potential and transforming how blockchain engages with the real world.

Tagi

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Aethir Tokenomics – Case Study

Kajetan Olas

22 Nov 2024
Aethir Tokenomics – Case Study

Authors of the contents are not affiliated to the reviewed project in any way and none of the information presented should be taken as financial advice.

In this article we analyze tokenomics of Aethir - a project providing on-demand cloud compute resources for the AI, Gaming, and virtualized compute sectors.
Aethir aims to aggregate enterprise-grade GPUs from multiple providers into a DePIN (Decentralized Physical Infrastructure Network). Its competitive edge comes from utlizing the GPUs for very specific use-cases, such as low-latency rendering for online games.
Due to decentralized nature of its infrastructure Aethir can meet the demands of online-gaming in any region. This is especially important for some gamer-abundant regions in Asia with underdeveloped cloud infrastructure that causes high latency ("lags").
We will analyze Aethir's tokenomics, give our opinion on what was done well, and provide specific recommendations on how to improve it.

Evaluation Summary

Aethir Tokenomics Structure

The total supply of ATH tokens is capped at 42 billion ATH. This fixed cap provides a predictable supply environment, and the complete emissions schedule is listed here. As of November 2024 there are approximately 5.2 Billion ATH in circulation. In a year from now (November 2025), the circulating supply will almost triple, and will amount to approximately 15 Billion ATH. By November 2028, today's circulating supply will be diluted by around 86%.

From an investor standpoint the rational decision would be to stake their tokens and hope for rewards that will balance the inflation. Currently the estimated APR for 3-year staking is 195% and for 4-year staking APR is 261%. The rewards are paid out weekly. Furthermore, stakers can expect to get additional rewards from partnered AI projects.

Staking Incentives

Rewards are calculated based on the staking duration and staked amount. These factors are equally important and they linearly influence weekly rewards. This means that someone who stakes 100 ATH for 2 weeks will have the same weekly rewards as someone who stakes 200 ATH for 1 week. This mechanism greatly emphasizes long-term holding. That's because holding a token makes sense only if you go for long-term staking. E.g. a whale staking $200k with 1 week lockup. will have the same weekly rewards as person staking $1k with 4 year lockup. Furthermore the ATH staking rewards are fixed and divided among stakers. Therefore Increase of user base is likely to come with decrease in rewards.
We believe the main weak-point of Aethirs staking is the lack of equivalency between rewards paid out to the users and value generated for the protocol as a result of staking.

Token Distribution

The token distribution of $ATH is well designed and comes with long vesting time-frames. 18-month cliff and 36-moths subsequent linear vesting is applied to team's allocation. This is higher than industry standard and is a sign of long-term commitment.

  • Checkers and Compute Providers: 50%
  • Ecosystem: 15%
  • Team: 12.5%
  • Investors: 11.5%
  • Airdrop: 6%
  • Advisors: 5%

Aethir's airdrop is divided into 3 phases to ensure that only loyal users get rewarded. This mechanism is very-well thought and we rate it highly. It fosters high community engagement within the first months of the project and sets the ground for potentially giving more-control to the DAO.

Governance and Community-Led Development

Aethir’s governance model promotes community-led decision-making in a very practical way. Instead of rushing with creation of a DAO for PR and marketing purposes Aethir is trying to make it the right way. They support projects building on their infrastructure and regularly share updates with their community in the most professional manner.

We believe Aethir would benefit from implementing reputation boosted voting. An example of such system is described here. The core assumption is to abandon the simplistic: 1 token = 1 vote and go towards: Votes = tokens * reputation_based_multiplication_factor.

In the attached example, reputation_based_multiplication_factor rises exponentially with the number of standard deviations above norm, with regard to user's rating. For compute compute providers at Aethir, user's rating could be replaced by provider's uptime.

Perspectives for the future

While it's important to analyze aspects such as supply-side tokenomics, or governance, we must keep in mind that 95% of project's success depends on demand-side. In this regard the outlook for Aethir may be very bright. The project declares $36M annual reccuring revenue. Revenue like this is very rare in the web3 space. Many projects are not able to generate any revenue after succesfull ICO event, due to lack fo product-market-fit.

If you're looking to create a robust tokenomics model and go through institutional-grade testing please reach out to contact@nextrope.com. Our team is ready to help you with the token engineering process and ensure your project’s resilience in the long term.

Tagi

Quadratic Voting in Web3

Kajetan Olas

04 Dec 2024
Quadratic Voting in Web3

Decentralized systems are reshaping how we interact, conduct transactions, and govern online communities. As Web3 continues to advance, the necessity for effective and fair voting mechanisms becomes apparent. Traditional voting systems, such as the one-token-one-vote model, often fall short in capturing the intensity of individual preferences, which can result in centralization. Quadratic Voting (QV) addresses this challenge by enabling individuals to express not only their choices but also the strength of their preferences.

Table of Contents

In QV, voters are allocated a budget of credits that they can spend to cast votes on various issues. The cost of casting multiple votes on a single issue increases quadratically, meaning that each additional vote costs more than the last. This system allows for a more precise expression of preferences, as individuals can invest more heavily in issues they care deeply about while conserving credits on matters of lesser importance.

Understanding Quadratic Voting

Quadratic Voting (QV) is a voting system designed to capture not only the choices of individuals but also the strength of their preferences. In most DAO voting mechanisms, each person typically has one vote per token, which limits the ability to express how strongly they feel about a particular matter. Furthermore, QV limits the power of whales and founding team who typically have large token allocations. These problems are adressed by making the cost of each additional vote increase quadratically.

In QV, each voter is given a budget of credits or tokens that they can spend to cast votes on various issues. The key principle is that the cost to cast n votes on a single issue is proportional to the square of n. This quadratic cost function ensures that while voters can express stronger preferences, doing so requires a disproportionately higher expenditure of their voting credits. This mechanism discourages voters from concentrating all their influence on a single issue unless they feel very strongly about it. In the context of DAOs, it means that large holders will have a hard-time pushing through with a proposal if they'll try to do it on their own.

Practical Example

Consider a voter who has been allocated 25 voting credits to spend on several proposals. The voter has varying degrees of interest in three proposals: Proposal A, Proposal B, and Proposal C.

  • Proposal A: High interest.
  • Proposal B: Moderate interest.
  • Proposal C: Low interest.

The voter might allocate their credits as follows:

Proposal A:

  • Votes cast: 3
  • Cost: 9 delegated tokens

Proposal B:

  • Votes cast: 2
  • Cost: 4 delegated tokens

Proposal C:

  • Votes cast: 1
  • Cost: 1 delegated token

Total delegated tokens: 14
Remaining tokens: 11

With the remaining tokens, the voter can choose to allocate additional votes to the proposals based on their preferences or save for future proposals. If they feel particularly strong about Proposal A, they might decide to cast one more vote:

Additional vote on Proposal A:

  • New total votes: 4
  • New cost: 16 delegated tokens
  • Additional cost: 16−9 = 7 delegated tokens

Updated total delegated tokens: 14+7 = 21

Updated remaining tokens: 25−21 = 425 - 21 = 4

This additional vote on Proposal A costs 7 credits, significantly more than the previous vote, illustrating how the quadratic cost discourages excessive influence on a single issue without strong conviction.

Benefits of Implementing Quadratic Voting

Key Characteristics of the Quadratic Cost Function

  • Marginal Cost Increases Linearly: The marginal cost of each additional vote increases linearly. The cost difference between casting n and n−1 votes is 2n−1.
  • Total Cost Increases Quadratically: The total cost to cast multiple votes rises steeply, discouraging voters from concentrating too many votes on a single issue without significant reason.
  • Promotes Egalitarian Voting: Small voters are encouraged to participate, because relatively they have a much higher impact.

Advantages Over Traditional Voting Systems

Quadratic Voting offers several benefits compared to traditional one-person-one-vote systems:

  • Captures Preference Intensity: By allowing voters to express how strongly they feel about an issue, QV leads to outcomes that better reflect the collective welfare.
  • Reduces Majority Domination: The quadratic cost makes it costly for majority groups to overpower minority interests on every issue.
  • Encourages Honest Voting: Voters are incentivized to allocate votes in proportion to their true preferences, reducing manipulation.

By understanding the foundation of Quadratic Voting, stakeholders in Web3 communities can appreciate how this system supports more representative governance.

Conclusion

Quadratic voting is a novel voting system that may be used within DAOs to foster decentralization. The key idea is to make the cost of voting on a certain issue increase quadratically. The leading player that makes use of this mechanism is Optimism. If you're pondering about the design of your DAO, we highly recommend taking a look at their research on quadratic funding.

If you're looking to create a robust governance model and go through institutional-grade testing please reach out to contact@nextrope.com. Our team is ready to help you with the token engineering process and ensure that your DAO will stand out as a beacon of innovation and resilience in the long term.

Tagi