For years, the blockchain industry has been defined by smart contracts. These digital agreements are secure and can be tampered with. They execute automatically when certain conditions are met. Blockchains like Ethereum are often associated with smart contracts. Developers can create "dApps" or decentralized applications that can replicate any product without needing a rent-seeking intermediary. Over the last year, smart contracts have evolved.
While developers are still building smart contracts with blockchains like Ethereum, they have begun to combine them using a new technology called Oracles. Oracles are entities that enable blockchains to communicate and interact with data and systems from the traditional world. The hybrid smart contract combines off-chain code with oracles on the chain. It has taken the world by storm. They offer dApps with improved functionality. The hybrid smart contract enables dozens more use cases across dozens of industries. Combining blockchains like Ethereum with Chain Link, a popular oracle network, is now securing digital transactions that manage billions to trillions of dollars in user funds.
Hybrid Smart Contracts
Hybrid smart contracts combine code that runs on the Blockchain (on-chain) with data and computation provided via decentralized Oracle networks off the Blockchain (off-chain). Hybrid smart contracts have the immutable and tamperproof properties of blockchains. Still, leverage off-chain oracle service to gain new capabilities such as scalability, confidentiality and connectivity to any real-world data source or system.
We'll talk about how hybrid smart contracts fit into new blockchain-based trust architectures and the various decentralized services Chainlink oracles provide to help them function better. Doing so makes it possible to develop new hybrid blockchain-based apps with the real-world features required to enhance cooperation amongst practically all important businesses in the future.
Hybrid smart contracts combine on-chain infrastructure and off-chain computation to create a rich, feature-rich application. Hybrid smart contracts can seamlessly integrate on-chain and offline components. This allows for smart contract use cases that would not be possible if only one component was used. Smart contracts are self-enforcing, coded and executed by Blockchain. These smart contracts can send and receive money and do simple calculations. However, they cannot access other data, perform complex calculations, or generate random numbers.
Before these restrictions, smart contracts could only fulfill a few of the same functions as conventional legal contracts. Oracle networks have now been added to the Blockchain, which can alleviate this issue. Oracle networks can provide off-chain data, verifiable randomness, and additional computational power for smart contracts.
Oracle networks are composed of validators who write data to the Blockchain. The Oracle aggregates inputs from multiple validators to ensure that one validator does not control the feed. To increase the robustness of their data, validators may use different methods to generate it. Oracle networks that guarantee verifiable randomness may require each validator to use a different pseudorandom number generation. Oracle networks can be decentralized so that you don't have to sacrifice the benefits of blockchain decentralization. A hybrid smart contract is a smart contract that uses an Oracle network.
Oracles Expand Blockchain-Based Collaboration
Blockchains are a type of computational infrastructure intended to promote reliable teamwork. The collaboration's participants must believe in its honesty, competence, and power. A contract is the best method to establish trust in a collaborative process. It outlines each party's responsibilities under the law and in business, as well as the penalties and benefits of their acts. The enforcement mechanism for contract commitments could be better. This is particularly true if one party has an unfair advantage over the infrastructure for enforcement, a better grasp of the fine language, and the resources or time to drag out the arbitration process. This has resulted in a system in which trust in the brand of a counterparty is fundamental to assessing their trustworthiness.
Blockchains are a collaboration-enabling technology that shifts the hosting, execution, enforcement, and custody mechanisms of a contract to software logic executed over a decentralized network that no single player can undercut. This replaces brand-based trust with math-based trust. Blockchains can be compared to computers without the Internet. They are secure because they are closed networks that allow for a limited number of collaboration types. This is akin to computers without the Internet. This isolation and limited functionality make blockchains highly valuable. However, it prohibits any collaboration not native to that specific Blockchain.
Oracles were created to allow for more collaboration on blockchains. This led to hybrid smart contracts and the creation of hybrid oracles. Oracles offer secure gateways to the outside world to enable smart contract applications to verify external events, trigger actions on other systems, and leverage computations that are not possible on-chain.
The Composition of Hybrid Smart Contracts
An application that consists of two pieces is called a hybrid smart contract. The first type is a smart contract, which only functions on a blockchain. The decentralized oracle network (or networks) offers safe off-chain services, enabling smart contracts to make up the second component. These two elements can work together invisibly and safely to build a hybrid smart contract application. This results in on-chain codes augmented in many important and unique ways. It opens up new use cases that wouldn't be possible with on-chain only because of technical, legal or financial limitations.
A hybrid smart contract synchronizes two distinct computing environments to create an application superior to a blockchain or an oracle network. This is because each environment has its unique features. Users benefit from a high degree of execution and storage determinism with on-chain programming since it will run exactly as written and produce outcomes that will be permanently and immutably stored in a blockchain environment with extremely low attack surfaces and limited functionality. DONs, on the other hand, run off-chain and offer infinitely greater functionality, flexibility and data access.
DONs provide the same level of tamper resistance and reliability as smart contracts but in an isolated off-chain environment that uses various security methods. Each DON offers a unique decentralized service for a specific application. This means that other smart contracts on the same Blockchain do not have to be tied to the DON's performance or the underlying blockchain consensus mechanism, which protects all smart contracts at risk. DONs, as standalone services, are advantageous from a security standpoint and allow for the flexibility to verify and compute on an infinitely more complex, open-ended off-chain universe.
Only if a smart contract is extremely decentralized and supported by strong crypto-economic security may it incorporate a DON to satisfy its particular external data needs. A different smart contract may choose a DON that has a more narrow set of credible nodes that uses advanced cryptographic techniques for private verifiable computing. With such heterogeneous network architectures, thousands to millions can run simultaneously without interdependencies and provide specific decentralized services to specific apps.
But some customers might split the cost of the DON service (e.g. many DeFi protocols currently fund the Chainlink USD Price Feed Oracle). This framework is needed to simultaneously address the needs of all apps and blockchains. For example, applications that run on a fast blockchain need external data and privacy. In contrast, those running on a highly decentralized one require scalable computation.
Hybrid Smart Contracts Combine On-Chain & Off-Chain Computation
Let's examine the roles of the different components on the on-chain and off-chain to understand their differences better.
On-Chain Blockchain
- Keep a persistent ledger that provides authoritative custody of assets and interacts with private keys.
- Final settlement is achieved by processing irreversible transactions that transfer value between users.
- To ensure the smooth operation of off-chain services provided by a DON, provide dispute resolution and guardrails.
Off-Chain: A Decentralized Oracle Network
- Securely obtain, verify, secure, and send data from external APIs to smart contracts using layer-2 solutions or blockchains.
- You can perform various computations to create smart contracts that run on layer-2 and blockchains.
- Relay outputs from smart contract code to external systems or other blockchains.
Hybrid Smart contracts have More Advantages Than Traditional Contracts
Smart contracts can be enforced using the Blockchain. This is a significant improvement over traditional contracts. Contracts are less expensive than traditional courts, meaning more peer-to-peer transactions could be governed by trust. Negotiating contracts between companies in different countries can be challenging. Navigating the various court systems can be costly, and the judicial systems of one country have limited power over corporations. Hybrid smart contracts do not suffer from this weakness. They don't recognize nationality.
Traditional contracts cannot be enforced through the courts. This is expensive and can lead to uncertainty about the outcome. Lawyers may find a loophole in a basement that could invalidate a contract. Even if the contract is in place, both contracting parties can still rely on the government's goodwill to enforce it.
This is evident in the recent moratorium on evictions in several states across the U.S. as well as other countries around the globe. A lease between tenants and landlords said that if the rent wasn't paid, the landlord might file an eviction lawsuit against the renter. The fact that governments across the globe took this action effectively voids every rental agreement in force at that time is something that needs to be discussed.
Rent agreements between landlords, and tenants who could pay were deemed unenforceable by the change, which didn't just affect tenants who couldn't pay rent. Renters who were able to make their payments would be allowed to stay. This meant that some tenants should have paid. Whatever your feelings about the eviction moratorium, it is obvious that hybrid smart contracts are superior to contracts that may be annulled at any point by a government official using a rubber stamp.
Hybrid smart contracts will replace future legal agreements. They are quicker, more effective, and less prone to legal pitfalls. They are more affordable and work both inside and outside of boundaries.
What are Hybrid Smart Contracts for Global Industries?
An hybrid smart contract framework called DONs enables smooth, secure, and all-encompassing automation across all entities using various platforms and blockchains. Chain Link empowers developers to overcome the technical limitations of smart contract technology by allowing them to use the deterministic execution guarantees offered by blockchain technology. They can also secure and outsource key functions such as external connectivity, privacy, scalability, and order fairness to DONs.
Hybrid smart contracts allow for more trust and efficiency in collaboration among network participants. They also offer a way to connect existing infrastructure with blockchain networks without backend modifications. DONs allow you to unlock many smart contract applications requiring privacy or scalability. This includes most enterprise use cases and financial and gaming applications that require high-throughput and immediate decision-making.
New use cases, like ones that employ verifiable randomization or decentralized transaction sequencing, are also made possible by hybrid smart contracts. This establishes a foundation for mathematically based economic transparency and justice inside social structures.
Hybrid smart contracts are expected to impact many major industries, including:
- Identity: Identity is identifying information that can easily be verified using an automated method and protected privacy. Smart contracts allow you to define what personal information is required and the actions are taken when you receive it. DONs can verify the identity of a user without making it public, revealing it to the counterparty and keeping it in an external database.
- Finance: Open financial markets that are globally accessible, transparent, and resistant to censorship. Smart contracts can set the rules for buyers and sellers. DONs can also price products and settle markets with external data. They can also perform computations for optional features such as transaction concealment, KYC verification, fair transaction ordering and high-speed off-chain processing.
- Supply Chain: Multi-party trade agreements that use a shared ledger to digitize product lines and automate processes across many platforms using verified data. Obligations, payment schedules, and penalties can all be specified in smart contracts. DONs have the ability to monitor shipments, confirm clients' identities, and start settlement payments. They can also trace shipments and keep an eye on quality control.
- Insurance: Insurance is parametric insurance. It's made possible by two-sided prediction markets based on pre-specified events. Smart contracts can be used to define premiums and claim processes. DONs can also connect the contract with external data feeds that can be used for quoting or arbitrating claims. DONs can compute risk assessments and retrieve complicated outcomes (e.g. from a cloud platform), and confidentially verify IDs.
- Gaming: Gaming platforms automate the issue of rewards and give players full ownership via NFTs of in-game assets. This provides definitive proof that all players have equal chances of winning. Smart contracts can be used to define the gameplay and reward distribution models. DONs provide tamperproof randomness that can ensure fair prizes and unbiased gameplay. Gaming dApps can connect to real-world data feeds, such as IoT sensor readings, and process certain game functions off-chain to improve performance.
- Marketing: campaigns that automatically distribute rewards in real-time based on data-driven performance goals. Smart contracts allow the creation of a tiered payment model that includes specific milestones. DONs can validate that performance metrics have been met and provide confidential computations regarding market trends and customer data for advanced campaign assessments.
- Governance: Distributed communities that manage shared assets and financial systems securely and fairly. Smart contracts can be used to define the governance framework. DONs can provide external data to calculate profit-sharing share fees, check identities to mitigate Sybil attacks, verify members' commitments, or automate decision-making.
Read More: The Future of Blockchain Is a Multichain Approach
Five Ways The Hybrid Smart Contract Model Could Transform The Blockchain Industry
These are just five ways the hybrid smart contract model could transform the blockchain industry.
Market Data for DeFi
The hybrid smart contract approach is the foundation for decentralized finance (DeFi). This idea uses a decentralized architecture that respects financial terms to bring back conventional financial products. Users of well-known DeFi apps can borrow, exchange, save, and build assets. The Oracle network is used to validate, retrieve and disseminate aggregated data from real life. This data determines how smart contracts can be executed and settled on Blockchains.
Oracle networks can crowdsource price data from DeFi giants like Aave and Compound in an extremely reliable and tamperproof manner. This allows them to assist lending apps Aave and Compound. Price data is the lifeblood of DeFi. It calculates lending rates, verifies limit orders, and executes liquidations.
Hackers know this and often try to manipulate price data to break smart contracts. DeFi apps that depend on low-quality, insecure oracle data or mechanisms can be severely affected. Many DeFi apps use oracle networks for data fetching from premium providers. DeFi developers have also benefited from hybrid smart contracts. Developers may concentrate on their products and connect to an existing decentralized Oracle network to obtain their data as necessary rather than worrying about building infrastructure to acquire price data for smart contracts safely. DeFi apps can be built like Uber apps, which combine Twilio and Stripe to provide location information.
Parametric Insurance
In addition to DeFi, the hybrid smart contract approach also has numerous additional uses. A range of intriguing new applications that will enhance people's lives can also be made using it. Arbol's parametric insurance contracts will automatically pay out when a weather event occurs. No matter how little or how much rain falls, all farmers must be able to obtain insurance payouts. Many farmers need insurance that pays promptly. With a smartphone, a farmer can protect himself against weather-related risks. This will make sure that one bad season doesn't lead to bankruptcy.
Satellite Information for Sustainable Agriculture
Hybrid smart contracts can be connected to the actual world and used to reward or promote positive behavior. The Institute for Cryptocurrencies and Contracts joined the Green World Campaign. They have designed hybrid smart contracts that employ satellite imagery to compensate land stewards who restore agricultural land. When satellite imagery shows an increase in tree cover, land stewards are paid transparently.
Dynamic NFTs
Non-Fungible tokens are blockchain-based assets that can identify an item. They have become a big hit on the global market recently, with both old and new artists adopting this technology. In that they didn't change, the first generation of NFTs needed to be more dynamic. The hybrid smart contract model could change this generation. Smart contract developers can use Oracle networks to create dynamic NFTs. These NFTs automatically adjust for changes in the real world. Weather and art could enhance NFTs to allow cards that evolve and change with the player.
Gaming is Random
Blockchains are unable to provide randomness by nature. Blockchain applications that depend on random number generation could be hacked to undermine trust. Any NFT and gaming applications that rely on random results are in danger. It is feasible to cast doubt on both the outcomes of blockchain simulations and the security and scarcity of NFTs.
Oracles are used in Axie Infinity, PoolTogether, and other well-known blockchain games to produce random numbers. These numbers are validated by cryptographic proofs that use a Verifiable randomness function. The outcomes of smart contracts are then checked to make sure they are fair and random by uploading these results to the Blockchain, where they can all be checked and validated. Thanks to hybrid smart contracts, blockchain games and NFTs can maintain their trustworthiness across all technological components. This allows for innovative use cases such as battle royales or a savings pool that is non-loss.
Smart contracts of the future will be able to interact with everything outside of the Blockchain. In contrast, early blockchain-based smart contract designs were essential in developing tokens and dApps. A potent synergistic value proposition will result from this, which may even outweigh the influence of the Internet on computers. The rationale for the widespread deployment of hybrid smart contracts grows stronger as more data is uploaded to blockchains via decentralized Oracle networks.
Finance Decentralized
Multiple DeFi applications are used by people to borrow, trade, create, and save assets. These apps can use hybrid smart contracts to obtain, validate, supply and verify data from the real world. This allows people to get reliable and accurate data. DeFi developers can now focus on developing products and not infrastructure to get price data for smart contracts with this contract.
Weather Forecasting
A hybrid smart contract allows for the easy transfer of weather data to blockchains. This allows businesses to create parametric insurance agreements that automatically pay for certain weather conditions. This insurance can be relied upon by farmers.
Gaming
Blockchains are not random in their operation. Hackers are attracted to blockchain apps that need to generate random numbers. Due to opaque randomness, games such as PvP battles or prize pools are vulnerable. With the help of DONs, a hybrid smart contract can produce tamperproof randomness. Smart contracts can also change the reward distribution model. Gaming dApps may use hybrid smart contracts to obtain real-world data to process functions that improve performance.
Dynamic Non-fungible Tokens (NFTs)
A dynamic NFT token is non-fungible and subject to outside influences. Developers of smart contracts have encoded it using a hybrid smart contract that communicates with the outside world utilizing DON. Users can utilize this interaction to engage in peer-to-peer trading and create NFTs.
Conclusion
On-chain and off-chain data are combined in hybrid smart contracts. This service enables access to real-world data sources and consensus-based data validation for enterprises. This blog offers information on new forms of smart contracts and how they address issues with conventional smart contracts.
Businesses can increase their growth potential by using hybrid smart contracts. They will be more widely adopted as there is more data available. Choosing the right partner to help you enter this new market is important. Errna Blockchain is the perfect partner for your blockchain project. Our smart contract developers have expertise in hybrid smart contract development. Get in contact with us today to take benefit of our services.
