Let’s talk about smart contracts and oracles.

Blockchain networks, or more specifically, the Ethereum network, allow for fast and secure transfers and creation of digital goods in addition to the storage and execution of tamper proof programs that can manage digital assets. These programs, once deployed on-chain, cannot be changed. They are available to everyone with access to the chain; they will execute based on the defined parameters; and, they are verified by the blockchain’s consensus mechanism. These characteristics allow anonymous parties to enter into binding digital agreements, or smart contracts. However, due to the nature of the blockchain, there is no way of reading off-chain data (e.g. internet APIs).

If a smart contract relies on off-chain data to evaluate or execute a function, parties currently rely on these options:

• Manually feed the data to the contract — the data can be easily compromised and is not a trustless mechanism.
• Trust a centralized party to provide the data — efficient but is a single point of failure.
• Rely on more difficult to implement solutions that pay less attention to security and focus on higher quantity data — this may not be a good option for some.
• Rely on a group of trusted known parties (Proof-of-Authority consensus) — not secure nor decentralized.

None of these strategies have proven to be optimal: decentralized, secure, and simple to implement.

Unfortunately, for smart contracts to bring true utility, off-chain data is necessary.

Suffice to say I was interested to talk to the Tellor team this past weekend at Coinvention in Philadelphia.

Tellor solves this problem by creating a system where parties can request data and miners compete to add this value to an on-chain data bank, accessible by all Ethereum smart contracts.

Inputs to a data series are secured by a hybrid Proof-Of-Work(PoW)/Proof-Of-Stake(PoS) consensus mechanism and by choosing the median of the first five values received. The PoS layer requires the miners to stake Tellor’s tokens, Tributes, to be allowed to mine and their stake can be slashed if the value reported by the miner is challenged (for a fee) and voted as a “bad” value by Tribute holders. If the Tribute holders vote the value as valid then the challenger’s fee is given to the miner. The PoW layer is the same consensus protocol as Bitcoin and utilizes a similar incentives mechanism through the issuance of Tributes, that are used to request data from the miners.

For a more detailed description of how Tellor accomplishes this, please see: The Tellor Whitepaper.

So, what can you do with this?

For one, I found a great devpost article that discussed how they combined UMA smart contracts with Tellor’s oracle to created tokenized derivatives:

“Imagine you want to buy a share of Tesla stock but you only have Ether and don’t trust central parties holding your money. UMA derivative contracts with a Tellor oracle allow you to buy a price representation of the stock as an ERC20 token on the Ethereum network. The possibilities for the number of assets on-chain and the utility of the Ethereum network is now limitless.”

So, how do you invest or get involved?

Surprisingly, this is a great opportunity if you’ve been looking to get into mining with CPUs. Currently, they only have 87 miners after having launched in August, so there’s a great chance to earn some passive income from a brand-new project.

They’re also looking for seed capital, which should tell you how nascent the project is, and the inherent risk of devoting any capital, time, or mining energy to it.

Still, I believe there to be a very large future use case for oracles and Tellor could certainly be in that race.