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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.
1. Market data for DeFi
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.
2. Weather data for parametric insurance
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. The ability to instantly receive an insurance payout when it rains too much or too little is incredibly important for farmers around the world, most of whom do not have access to trusted insurance products with timely payouts. With hybrid smart contracts, a farmer could hedge against weather risk with little more than a smartphone, ensuring just one bad weather season doesn’t cause bankruptcy.
3. Satellite data for regenerative agriculture
Because hybrid smart contracts can interact with our real world, they can also be used to encourage or incentivize important behavior. For example, the Green World Campaign, in conjunction with Cornell University’s Initiative for Cryptocurrencies and Contracts (IC3), is building hybrid smart contracts that rely on satellite imagery to reward people who help regenerate agriculture on important tracts of land, such as through reforestation. When oracle networks report increased tree cover in satellite imagery, land stewards are paid out for their hard work transparently and fairly.
4. Dynamic NFTs
Non-Fungible Tokens (NFTs) are blockchain-based assets that represent a unique item. They have taken the world by storm in recent months, with both old and new artists entering this new space. While the first generation of NFTs was static in that they didn’t change, the hybrid smart contract model could completely transform the next generation of this popular trend.
By using oracle networks, smart contract developers can create “Dynamic NFTs”, or NFTs that can automatically change when something happens in our real world. For example, NBA Rookie of the Year Lamelo Ball is creating NFTs that alter based on his performance as a player and the progression of his career, introducing additional utility for holders. Sports cards that develop and change with the player or artwork augmented by the weather could make NFTs a much more meaningful experience for fan reward programs and digital “living” art.
5. Randomness in gaming
By their nature, blockchains cannot securely generate randomness. As a result, many blockchain applications that rely on random number generation are often hacked or exploited, reducing trust from users. This poses a massive problem when it comes to all sorts of gaming and NFT applications that rely on random outcomes, whether they’re randomized prize pools, rare NFT drops, PvP battles, or even the creation of in-game items. With insecure or opaque randomness, the outcomes of blockchain games and the rarity of NFTs can be called into question.
To overcome this limitation, popular blockchain games, like Axie Infinity, PoolTogether, and EtherCards use oracles to generate random numbers backed by a cryptographic proof using a Verifiable Randomness Function (VRF). These results are brought onto the blockchain where it can be verified in a fully transparent manner and ensure smart contracts outcomes are random but provably fair. In this case, hybrid smart contracts enable blockchain games and NFTs to retain their trustworthiness throughout all elements of their technology stack and has led to innovative new use cases such as no-loss savings pools, battle royales, “living” or “dynamic” NFTs, and more.
While early blockchain-based smart contracts played a massive role in the creation of tokens and dApps, the next evolution involves smart contracts that can interact with everything outside the blockchain, connecting this new world to our existing world for a power synergistic value proposition potentially on par with the internet’s effect on computers. With more and more interesting datasets being piped onto blockchains through decentralized oracle networks, the case for widespread adoption of the hybrid smart contract model becomes more powerful every day.