The oracle problem
The oracle problem revolves around a very simple limitation—blockchains cannot pull in data from or push data out to any external system as built-in functionality. The isolation of a blockchain is the precise property that makes it extremely secure and reliable, as the network only needs to form consensus on a very basic set of binary (true/false) questions using data already stored inside of its ledger.
To overcome this lack of connectivity with the outside world, hybrid smart contracts use oracles as middleware to retrieve external data inputs, push data outputs to external systems, and perform scalable off-chain computations. Not only do oracles serve as a two-way bridge between smart contracts and the outside world, but they also provide a security framework for protecting against any single point of failure such as data manipulation and downtime.
Notable Oracle Failures
- During the LUNA 2022 Collapse, the Chainlink LUNA price went out of range and kept returning $0.10 while the price of the asset fell to as little as $0.000005 resulting in the hack of two protocols Blizz Finance and Venus.
Sources
https://blog.chain.link/what-is-the-blockchain-oracle-problem/
https://medium.com/api3/the-api-connectivity-problem-bd7fa0420636