For years, the blockchain industry has been defined by the excitement around smart contracts, or tamper-proof digital agreements that automatically execute when a certain condition is met. Typically associated with blockchains like Ethereum, smart contracts allow developers to build decentralized applications or “dApps” that recreate all sorts of products without the need for a rent-seeking middleman. However, over the last year, smart contracts have begun to evolve.
While developers are still building smart contracts on top of blockchains like Ethereum, they’ve also begun to combine them with an entirely new piece of technology: oracles. Oracles are entities that enable blockchains to interact with data and systems from the traditional world.
As a result, “hybrid smart contracts”, or smart contracts that combine on-chain code with off-chain oracles, have taken the world by storm due to the enhanced functionality they enable for dApps. Today, hybrid smart contracts power several new use cases across dozens of industries, and the combination of blockchains like Ethereum and popular oracle networks like Chainlink are now securing digital agreements that handle tens of billions of dollars in user funds.
Here are five exciting ways in which the hybrid smart contract model is transforming the blockchain industry.
Today, the hybrid smart contract model forms the backbone of much of the decentralized finance (DeFi) industry, which seeks to recreate traditional financial products using decentralized architecture to honor financial terms. Hundreds of popular DeFi applications that let users borrow, lend, trade, save, and create assets now rely on an oracle network to fetch, validate, and deliver aggregated data from the real world. This data then determines how smart contracts execute and settle on blockchains.
For DeFi giants like lending apps Aave and Compound, oracle networks can crowdsource accurate price data in a highly reliable and tamper-proof manner. Price data is the lifeblood of DeFi and is used to execute liquidations, determine lending rates, and verify limit orders by providing the fair market valuation of cryptocurrency, commodities, and more.
Hackers know this and often try to manipulate price data as a way of breaking a smart contract, causing great harm to DeFi apps that rely on low-quality data or insecure oracle mechanisms. To avoid this problem, many DeFi apps have turned to oracle networks that fetch data from premium data providers and that consist of nodes that are operated by professional DevOps teams.
The rise of the hybrid smart contract model has also been a boon for DeFi developers; instead of trying to figure out how to build infrastructure to securely source price data for their smart contracts, they can focus on their products and simply plug into an existing decentralized oracle network for their data when ready. In the same way that apps like Uber combine services like Twilio for messaging, Stripe for payments, and Google Maps for location, DeFi apps are being built by combining on-chain smart contract code with oracles for off-chain price data.
Beyond DeFi, the hybrid smart contract model is being used to build all sorts of interesting applications that can change people’s lives for the better. Decentralized oracle networks now have the ability to deliver data onto blockchains about the weather from sources like the National Oceanic and Atmospheric Administration via Google Cloud or Accuweather, meaning projects like Arbol can build parametric insurance contracts that automatically pay out when a certain weather condition is hit.
