Why Oracles Are Needed

A key component of the Ethereum platform is the Ethereum Virtual Machine, with its ability to execute programs and update the state of Ethereum, constrained by consensus rules, on any node in the decentralized network. In order to maintain consensus, EVM execution must be totally deterministic and based only on the shared context of the Ethereum state and signed transactions. This has two particularly important consequences: the first is that there can be no intrinsic source of randomness for the EVM and smart contracts to work with; the second is that extrinsic data can only be introduced as the data payload of a transaction.

Let’s unpack those two consequences further. To understand the prohibition of a true random function in the EVM to provide randomness for smart contracts, consider the effect on attempts to achieve consensus after the execution of such a function: node A would execute the command and store 3 on behalf of the smart contract in its storage, while node B, executing the same smart contract, would store 7 instead. Thus, nodes A and B would come to different conclusions about what the resulting state should be, despite having run exactly the same code in the same context. Indeed, it could be that a different resulting state would be achieved every time that the smart contract is evaluated. As such, there would be no way for the network, with its multitude of nodes running independently around the world, to ever come to a decentralized consensus on what the resulting state should be. In practice, it would get much worse than this example very quickly, because knock-on effects, including ether transfers, would build up exponentially.

Note that pseudorandom functions, such as cryptographically secure hash functions (which are deterministic and therefore can be, and indeed are, part of the EVM), are not enough for many applications. Take a gambling game that simulates coin flips to resolve bet payouts, which needs to randomize heads or tails—a miner can gain an advantage by playing the game and only including their transactions in blocks for which they will win. So how do we get around this problem? Well, all nodes can agree on the contents of signed transactions, so extrinsic information, including sources of randomness, price information, weather forecasts, etc., can be introduced as the data part of transactions sent to the network. However, such data simply cannot be trusted, because it comes from unverifiable sources. As such, we have just deferred the problem. We use oracles to attempt to solve these problems, which we will discuss in detail, in the rest of this chapter.