Blockchain, and by extension smart contracts, are changing the way agreements are done. By eliminating the middleman and enabling the automatic execution of contract terms based on predefined rules, the technology has the potential to revolutionize a variety of industries.
A recent World Bank report, which focused on the potential of smart contracts in driving financial inclusion, concluded that the technology could foster inclusion among consumers and micro, small, and medium-sized organizations in financial services such as insurance and supply-chain finance. And away from financial services, smart contracts can also be used in record storage, escrow services, clinical trials, supply chain management, real estate, and even governance.
At their core, smart contracts have the potential to lower transaction costs and increase efficiencies in a wide array of industries. They effectively minimize counterparty risk and provide transparency by eliminating the middleman and utilizing blockchain tech. On the flip side, smart contracts have several limitations to their capacity.
For one, smart contracts cannot pull in or push out data to any external system as built-in functionality. For instance, a financial smart contract would rely on information from the market to determine settlements. Similarly, a trade finance contract would need trade documents and digital signatures before it is executed. A smart contract cannot directly access any of these traditional services; neither can it inherently generate any of the needed information. This limitation introduces what is now known as the “oracle problem.”
The oracle problem sheds light on the security, and trust conflict between third-party oracles and the trustless execution of smart contracts. It raises the question of how authentic and reliable a data feed from an external system is. This ultimately removes the “trusted execution” tag of smart contracts. Furthermore, while this bottleneck may not be such a big deal in retail applications, existing oracle protocols are quite unsuitable for commercial applications because users are forced to rely on the accuracy of the oracle without any means of verifying its reliability or securing recourse should things go south.
The limitations of oracles in regards to their use with smart contracts are well-documented, and several platforms have risen to the challenge to build decentralized oracle solutions. QED is one of such platforms that are taking a unique approach to the problem.
QED is a decentralized oracle protocol that is building a robust economic system to bridge the gap between blockchains, smart contract platforms, and off-chain data sources. QED’s solution is broken down into three primary business models.
In solving the problem of commercial viability, QED utilizes external oracle bond collateral that is defined by the level of risk exposure of the smart contract. The collateral is external to the protocol’s ecosystem and therefore eliminates systemic risks.
As a second focus, the protocol uses an economic incentive model to optimize the performance of the ecosystem and the value of the QED token. Oracles are systematically scored on their capital efficiency, ensuring that fees are diverted to oracles with high historical accuracy while eliminating poor performers.
Finally, a post-execution resolution process is used to determine loss restitution. In the event of a loss, customers can use the collateral claim process to recover their losses. Moreover, restitution of losses is gotten from the collateral provided by inaccurate oracles.
In conclusion, while other oracle protocols have focused on technological improvements in the form of high throughput and frequency, QED is arguably the first protocol to look at things from the commercial angle. Its combination of recourse mechanisms with other commercially oriented features is expected to level the playing field between blockchain oracles and their users.