Web3 oracle nodes: The capabilities and challenges of an industry disruptor

In Greek mythology, oracles took once unattainable information from the gods and shared it with the world. Today, blockchain oracles pass information from one source to another. By design, a blockchain does not communicate with outside data sources; they only store historical on-chain user data. A blockchain oracle is the middleware that allows a blockchain to communicate with off-chain data. The addition of off-chain data provided by blockchain oracles was a huge step forward for the Web3 industry, enabling new use cases in decentralized finance and other fields. If someone owns or has access to useful data, spinning up a blockchain oracle could be profitable.

“Oracle” is a broad term in the industry. There are many blockchain oracle protocols to choose from. The default option is Chainlink, which has significant adoption across layer 1 blockchains and protocols running within them. With that said, each oracle option has different requirements and procedures to get a user’s precious data from Web2 to Web3. Though the process may be slightly different for each protocol, node hosts still face similar challenges (such as managing tedious day-to-day API maintenance, ensuring quick and secure data transfer, and developing the technical know-how to create and manage a blockchain oracle protocol’s node). APIs can be used by blockchain oracles to access and retrieve data from external sources, which can then be used to trigger smart contract executions or update the state of a blockchain-based application.

1. API Maintenance. Whether in Web2 or Web3, APIs follow the same rigid lifecycle: create, manage, secure and socialize. It is critical to enable developers to easily deploy, improve and automate within API creation. Effective API management allows developers to control, promote and package their APIs (among other tasks). The ability to authenticate, manage traffic and provide meditation is essential to ensure data is safe, because if APIs are not secure, they are useless. Finally, it is essential to provide developers with tools to easily access and view all created APIs within an organization, which will improve efficiency and eliminate bottlenecks in their work. To effectively use APIs and host a blockchain oracle node, it is necessary to properly address all four areas of the lifecycle to ensure a smooth and efficient experience.
2. Timely, secure data transfer. For an API to work, there must be data available for transmission, but it is critical to be aware of possible threats. Network congestion or poor connection could hinder performance. Data must be available and accurate, especially if the data being handled is financial transactions, as these data points must be transmitted only once (as redundant logging brings irreparable consequences to the organization). Even if data is being transferred efficiently, it could potentially be altered due to malicious activity. In this situation, the organization will be uploading falsified data and ruining its reputation, which again leads to irreparable consequences.
3. Creation and management of a blockchain oracle node. Chainlink has great documentation to support this process, but it can still be difficult. One way to solve these challenges is to use an offering known as “node as a service” This solution will offload all management of your node. This is a useful option, but not everyone is looking to offload the work to third parties. Instead, many are looking for assistance in specific areas.

Web3 blockchain technology leapt forward with the introduction of oracles and their ability to bring off-chain data on-chain. GitHub, with over 4000 repositories touching Chainlink alone, shows just how popular oracles have become. Blockchain oracle protocols like Chainlink offer a chance to establish nodes and receive compensation for successfully providing data. Decentralized finance protocols like Aave, Compound and Maker require off-chain price feed data to allow for options, futures, synthetic assets and more. Insurance protocols like Arbol use off-chain rainfall datasets to “settle parametric crop insurance contracts that provide coverage based on the amount of rainfall in the region.” Another project, Etherisc, provides flight delay insurance by using off-chain flight data. For these projects to function, data providers must properly manage their APIs and ensure their data is flowing continuously and accurately. Because blockchain technology is so new, and oracles are even newer, projects spring up each day.