Oracles
TLDR:
By enabling more redundancy, optionality, privacy, and geographic-distributed security, smart contracts powered by off-chain oracles enable safer, more censorship-resistant experiences for users.
Why and when do we need external parties to influence contracts?
When using smart contracts, we look for security guarantees (ex. contracts terms will be followed, there will be no censorship or confiscation). Most contracts require a set of parties to attest if some external event occurred (ex. price changes). Smart contract protocols should minimize the occasions where outside influence is necessary, but when needed, users have 3 options (trust a set of oracles, trust a multi-sig, or trust a custodian). Using oracles to help settle contracts provides several advantages versus the other 2 options.
Redundancy:
First, increasing the set of parties used to settle contracts provides us with greater security guarantees. This is because the more people needed to collude, the harder it is that collusion will occur. Given that, using oracles provides various benefits:
It is simply easier to create a contract settled by a large set of oracles than a large set of multi-sig signers due to the significant increased coordination costs in creating a large multi-sig.
Most blockchains have technical limitations on how many people can join a multi-sig whereas there are usually no limitations on how many oracles can be used to influence a contract.
Optionality:
Protocols, like the Lava Loans Protocol, also make it easy for users to choose which oracles they want to use in their individual contracts. This enables users to tailor trust requirements for their needs, whereas with most multi-sig products, there are no options to tailor a multi-sig to the user’s desired trust requirements. This also means that the failure of one contract does not indicate the failure of all contracts.
Privacy:
In the specific case of zero knowledge smart contracts, which power the Lava Loans Protocol, oracles are “blinded,” meaning that they do not know which contracts are using their data. Thus, it’s significantly more difficult for an oracle to attempt to manipulate a contract. In contrast, if you’re using a multi-sig or custodian to power your contract, they are aware of your contract and can more easily collude against you.
Geographically-distributed security:
A multi-sig or custodian is usually a financial institution that is easier to target than a large set of geographically distributed, blinded oracles. Using oracles, contracts can be resistant to attack vectors stemming from one geography.