A Visit to the Oracle

Smart contracts are poised to revolutionize the ways that humans, machines, and organizations create and enforce contractual relationships. Everything from property ownership to financial instruments to family arrangements can now be implemented as a piece of code on a publicly verifiable shared ledger known as a blockchain.

This code is “smart” in many ways :  it is self-executing, modular, and able to drastically lower the transaction costs associated with contracts . However it is less adept in its ability to receive and verify information from the outside world. For example, an insurance contract can be programmed to pay a car owner some amount if their car is damaged, but it cannot independently assess such damage.

The need for oracles arises due to this gap between the world of blockchain code and real world events. An oracle, in the context of blockchains and smart contracts, is an agent that finds and verifies real world occurrences and submits this information to a blockchain to be used by smart contracts. This agent can be software, hardware, or human.

A software based oracle could be programmed to search for and parse text for information, but may suffer from difficulty with information categorization and resolution of ambiguous events. Such oracles will likely find to be most immediately applicable to the verification of events happening on other blockchains. Hardware oracles will likely involve submitting sensor data and will find application in the Internet of Things. Human oracles are likely to be the dominant form in the near future as they can independently view or research an event outcome.

Regardless of implementation, oracles provide an indispensable service by connecting smart contracts and distributed autonomous organizations with real world data and events.

Prediction markets rely on oracles for market resolution

At the conclusion of each market an oracle must input the event outcome. This input is used to determine the accuracy of predictions and resulting share value.

Some events are more easily verified than others. For example, if well defined, the price of a particular cryptocurrency at a given time could be verified by a piece of code that accesses an exchange API and submits that data to the associated smart contract. Other information, such as whether or not a scientific breakthrough has been made, can be harder to verify and benefits from human input. Reality Keys has provided an oracle solution that automates event checking and cryptographic oracle submission. More recently, Oraclize has offered a similar solution specifically designed for Ethereum Distributed Applications.

Problems arise from using only one oracle for event resolutions. For example, some events may require specialized knowledge or the sheer volume of events may overwhelm a single oracle. An additional concern is the risk of an oracle defrauding participants by purchasing shares in a highly unlikely outcome and falsely resolving the event toward that outcome. This results in a large profit opportunity for an unscrupulous oracle. If a market for the winner of a sports match is resolved by a single oracle and the odds for that market are 20 to 1, the oracle would buy shares in the latter outcome and resolve accordingly resulting in a guaranteed large profit. If the profit from such a maneuver is larger than projected revenue from running an honest oracle and the risk of legal recourse is low, then a rational (though highly unethical) decision is to defraud the market and abandon oracle services.

To address these challenges, we have built a market for oracles

Within the Gnosis interface anyone can sign up to provide oracle services. Reputation can be bootstrapped by connecting a Twitter account. Terms, fees, and specialization can be specified by the oracle upon sign up. Market creators can choose between any oracle listed to provide event resolution.

For further security, a combination of oracles can be chosen for event resolution. For example, a market creator may select 5 oracles for resolution and require a 3 out of 5 majority for event decision. By requiring oracles to submit security deposits this scenario creates risk of loss for oracles who lie about event resolution or attempt to collude to do so. In the extreme scenario, market participants can challenge a resolution, pushing it to a second step, which we are calling the “Ultimate Oracle”.

With the Ultimate Oracle, a market is created on “What was the outcome of this event?”. Participants can place bets on either side of the market. After the betting period, a 24 hour timer starts. If at the conclusion of the 24 hours, the outcome remains the same then the market is closed. Participants on the winning side of this market are rewarded and the other side suffers a loss. The original market is then resolved by the outcome of this secondary market.

Reality Keys and Oraclize will be included as initial oracle solutions, but we expect a variety of oracles to flourish and encourage anyone interested to sign up to become an oracle. Through this oracle market it will also be possible for existing data providers to become oracles. Examples include Bloomberg for financial market data or ESPN for sports market data. Alternatively, a savvy independent provider could subscribe to these data services in order to share the information on chain. This combination of an open market for specialized oracles, the ability to construct redundant oracle resolution, and a worst case game theoretic oracle, leads to an ideal oracle solution that is time and cost efficient, scalable, and highly secure.

As blockchain based economies proliferate an ecosystem of oracles will develop to provide a bridge between digital and physical worlds

Profit opportunities will arise for participants who can accurately provide information to these digital economies. We envision three forms of such interactions: oracles for uploading of event outcomes, prediction markets for open probability aggregation, and private data sales. Gnosis provides solutions for the first two of these interactions. Our markets can be customized to seek probability estimates for any decidable event. These estimates can be used by external smart contracts to price insurance services (cost of housing insurance determined by market for severe weather, for example) or trigger contractual events (i.e., sell a commodity if the market projection drops below a price threshold). Oracle submissions can be used directly for smart contract triggers or to resolve prediction markets. In doing so, we seek to provide a long-term complete solution for probability and decision outcome data in digital economies.

Matt Liston is an entrepreneur with endless creativity and Co-Founder of Augur Project.