The blockchain industry has long been defined by interest and excitement around smart contracts. These are tamper-proof self-executed digital agreements happening when a certain set of rules is met. Even though smart contracts are mostly associated with blockchains like Ethereum, they are also used to develop decentralized applications (dApps), which are gaining popularity thanks to the reduced need for intermediates.
While these two use cases were only for smart contracts, they have greatly evolved over the last few years. Now smart contracts can be combined with a brand-new piece of technology known as oracles. As a result, the market welcomed hybrid smart contracts that blend on-chain code with off-chain oracles.
While hybrid smart contracts are believed to change the game rules on the blockchain market, they have already powered several new use cases across dozens of industries. But what do we know what is a hybrid contract? What are their use cases? Or how to use them to power up the blockchain development process? Let’s explore all the answers in this guide.
What are Hybrid Smart Contracts?
The hybrid contract uses decentralized oracle networks (known as DONs) to obtain off-chain data. DONs refer to peer-to-peer networks containing several participants that form a consensus on data before it can be shared with smart contracts.
As a result, hybrid smart contracts can process the off-chain data while also maintaining decentralization within networks. This is the key feature that allows the development of more advanced blockchain-based apps.
Hybrid smart contracts send a data request to DON whenever it needs off-chain data. Then, an oracle smart contract within DON gets the data and creates a log event and all entailing request details.
The process informs off-chain nodes, which are connected with the log, and then oracle nodes collect data from the log event. Then they can use various external sources, like APIs, to gather data and place it on-chain for smart contracts usage. It is also vital to note that oracle nodes connect with a consensus to validate the data before sending it.
The Composition of Hybrid Smart Contracts
Hybrid smart contract apps are made up of two parts:
1. Smart contract – it is a code running exclusively on the blockchain;
2. Decentralized oracle network(s) – these are secure off-chain services supporting the work of smart contracts.
These two elements work with each other seamlessly and securely to create a single hybrid smart contract app. As a result, on-chain code is supplemented by a variety of unique and important methods, which allows it to get many more use cases that are not possible with on-chain code alone, thanks to technical, legal, and financial constraints.
Hybrid smart contracts are used to synchronize two distinctly different computing environments, resulting in a superior app that blockchain or an oracle could achieve on their own, mainly because each environment specializes in offering features that the other does not.
On-chain code runs in secure and extremely limited-functionality blockchain conditions. Therefore, they have a smaller attack surface area and allow the code to run precisely as written. In contrast, DONs run off-chain, so they offer higher functionality, flexibility as well as data accessibility.
Even though the surface of DONs is higher than with on-chain code, they still provide extremely high levels of tamper-resistant and reliability to comply with the industry’s requirements and ensure smart contracts offer all guarantees. They achieve this security by working in an isolated off-chain environment using various security approaches.
Chainlink Decentralized Oracle Network that Powers Hybrid Smart Contracts
Chainlink is a decentralized network of oracles allowing smart contracts to securely interact with real-world data and services existing outside of the blockchain environment. Using Chainlink allows traditional systems currently powering modern economies to connect to blockchain technology in order to work more security, efficiency, and transparency within a business and social processes.
With the rapid growth of cryptocurrencies and the need for more secure and efficient operations, more businesses are entering the industry and wondering what is the hype around Chainlink and what does it mean to the domain?
Chainlink is a decentralized network that allows blockchain technology and smart contracts to reach their maximum potential. Being a decentralized oracle network, Chainlink was built to enable smart contracts to automate the data transfer between blockchains and outside through a highly secure and reliable process.
Chainlink uses a model similar to what is used by a blockchain, where it relies on independent entities (oracles) collectively retrieving data from many sources, aggregating it, and delivering a validated, single data point to start smart contract execution, thus reducing any centralized point of failure.
A good example of how Chainlink works is by offering the USD price for Ethereum’s cryptocurrency ETH to blockchains through the ETH/USD Price Feed. This feed requires several independent oracle nodes and data sources to collect and deliver the price data.
5 Use Cases for Hybrid Smart Contracts
1. Market Data for DeFi
The hybrid contract model creates the backbone of the lion’s share of the decentralized finance (DeFi) industry. DeFi aims to recreate traditional financial systems and products, offering higher flexibility, speed, and security. However, not everyone knows that most DeFi apps, or dApps, allowing users to borrow, lend, save, trade, and create assets rely on an oracle network. And this network is responsible for fetching, validating, and delivering aggregated data from the real world. The aggregated data then determines how smart contracts execute and settle on blockchains.
Hybrid smart contracts can serve different purposes for DeFi. For example, for lending applications such as Aave and Compound, oracle networks are used to crowdsource accurate price data while being reliable and tamper-proof. Price data is essential for DeFI since it helps execute liquidations and identify lending rates while also verifying limit orders by offering a fair and accurate market valuation of crypto.
Since hackers know that fact, they usually try to use price data as an entry point for user manipulation and break smart contracts. And this can cause huge damage to both – owners of the app and users, but it often happens with low-quality data or insecure oracle mechanisms. DeFi applications use oracle networks to avoid this problem since they can fetch data from premium providers that consist of nodes operated by top-notch DevOps teams.
2. Weather Data for Parametric Insurance
Even though DeFi is currently the most popular and obvious use case of hybrid smart contracts, they also serve a good purpose for building all sorts of engaging apps that can change people’s lives for the better. Oracle network models can now transfer weather data onto blockchains from trusted sources like the National Oceanic and Atmospheric Administration using Google Cloud or Accuweather. As a result, projects can now develop parametric insurance contracts that will automatically execute when a certain weather condition is met.
Getting instant payments through an insurance payout when there is too much or too little rain is essential for farmers, and most of them do not have access to reliable insurance products with instant payouts. This is where hybrid smart contracts come into the picture, offering farmers an opportunity to hedge against weather risk just by using a smartphone, making sure the next bad weather season won’t damage their finances.
3. Satellite Data for Regenerative Agriculture
The hybrid contract can interact with the real world. Therefore, one of their use cases is to motivate and reward suitable and beneficial behavior. One of the real-life cases is the Green World Campaign, which has built hybrid smart contracts relying on satellite imagery to reward farmers for helping regenerate agriculture on crucial tracts of land.
4. Dynamic NFTs
With the increased popularity of Non-Fungible Tokens (NFTs), hybrid smart contracts found their purpose in that field as well. The first generation of NFTs was static, and they quickly lost their popularity, so the hybrid smart contract model is believed to entirely transform the next generation of these assets.
Blockchain developers now can use oracle networks to build “Dynamic NFTs,” or NFTs that can change when something is changing in the world. While this will be an entirely new user experience, NFTs can also be used as an illustration of the real world, giving their higher value.
5. Randomness in Gaming
Blockchain can’t generate randomness by its nature. Therefore, we see lots of applications and games that rely on random number generation, which can quickly be hacked and exploited. While this ruins users’ trust and experience, a company can also lose money.
But this can become a bigger problem in the case of gaming and NFT applications that rely on random outcomes, where apps can reward users with rare NFT drops, cryptocurrency, PvP battles, and so on. With poor quality and insecure randomness, the outcomes of blockchain games can be called into question.
For example, one of the most popular NFT games called Axie Infinity, has applied oracles to generate random numbers powered by a cryptographic proof through a Verifiable Randomness Function (VRF). As a result, game outcomes are transferred into the blockchain, where they can be verified in a secure, accurate, and fully transparent manner. Hybrid smart contracts allow blockchain games to regain trust and bring users a quality yet fair experience.
How Hybrid Smart Contracts Are Changing the Blockchain Industry
The popularity and increased use of hybrid smart contracts have opened a door for DeFi developers, allowing them to focus on building projects and plug into an existing decentralized oracle network for vital data instead of creating a secure infrastructure to source price data for their smart contracts. DeFi combines on-chain smart contract code with oracles to obtain off-chain price data, just like many popular applications combine extra services for easy and smooth workflow instead of building one from scratch.
As you can see, DeFi isn’t the only domain that already benefits from hybrid smart contracts. This model has been used to develop all kinds of engaging applications aiming to improve people’s lives. In general, the ability of these decentralized oracle networks to perform more complex computations will allow smart contracts to perform more tasks, offering a better user experience and easier and more efficient processes across blockchain that have long been limited by the code.
How Can Interexy Help?
Interexy is a leading blockchain development company in Dubai, Miami, and London. We offer complex blockchain development services, covering all sorts of blockchain-based applications for your market success.
We also have the largest staff of blockchain developers on the market, ensuring each and every specialist is qualified and has extensive expertise in the industry to guarantee top-notch results for our client’s projects.
Offering clients a flexible development approach, our smart contract development services help clients build and craft fail-proof smart contracts across industries and help organizations fill their expertise gaps in a timely and cost-effective manner.
The concept of self-executing contracts isn’t new to the modern market, yet now the technology exists to make them more available and effective. The transparency offered by the hybrid contract model is unparalleled and is believed to change the blockchain industry in a few years. Hire blockchain developers or explore more about our process by filling out a simple form!
What are hybrid smart contracts?
A hybrid smart contract comprises a smart contract and decentralized oracle networks. It is a code running exclusively on the blockchain, on-chain. And decentralized oracle networks refer to secure off-chain services supporting the work of smart contracts.
How do hybrid smart contracts differ from traditional smart contracts?
While the smart contract is a code running exclusively on the blockchain, on-chain, hybrid smart contracts (decentralized oracle networks) are secure off-chain supporting smart contracts. This way, hybrid smart contracts combine on-chain information and off-chain data.