As storing information on the blockchain becomes more popular, the availability of smart contracts becomes more widespread. They behave according to established parameters, automatically letting events happen once specified conditions are met.
However, the blockchain has limitations to accommodate, which has led to people exploring the possibilities of off-chain data.
Such transactions occur on a cryptocurrency network that moves the data outside the blockchain. Here's a look at why off-chain data is essential for helping smart contracts function.
Smart contracts and the information they contain typically reside on the blockchain. A major limitation is that smart contracts cannot pull data from sources outside of the blockchain. Instead, the data gets pushed onto the blockchain.
Data retrieval is only one obstacle, however. Another issue crops up if constant fluctuations occur in the data arriving on the blockchain. The information gets replicated across nodes. You can imagine the problems that would arise if variations in the data occur across seconds or less.
Two nodes on the blockchain could have different values for the data in question due to shifting circumstances during brief moments in time.
The nodes require consensus before registering information onto the blockchain. Conflicting data prevents that from happening. However, parties engaged in smart contracts can solve that issue by using third-party services called oracles.
An oracle pushes information onto the blockchain at predetermined times, but only after checking for and recording minor variations that could interfere with consensus.
Another example of off-chain data influencing what the blockchain contains relates to governance issues affecting compliance. If the parties involved in a smart contract must abide by capital controls when transferring security tokens, an outside party would validate their transfer before adding it to the blockchain.
Such circumstances illustrate why on-chain data alone is insufficient for smart contracts and the matters associated with them.
Plenty of compelling reasons exist for a person or company to use smart contracts. Better accuracy is a huge perk, especially since smart contracts have automated responses to reduce errors. Mistakes can happen, but only if the party programming the contract makes an error.
Moreover, smart contracts use the highest level of data encryption currently available. That security-related benefit is crucial, especially since contracts often contain sensitive, confidential information.
Legal document stipulations describe the proper security levels for compliance, plus require following any industry or client-related specifics about information retention. Some newer blockchains allow people to remove data after designated periods.
These things point to some of the reasons why smart contracts make sense. The recordkeeping and computational aspects of traditional contracts can cause headaches for those involved. The automated elements of smart contracts help remove intermediaries and lessen the required human interactions with the data.
However, scalability is an issue for blockchains. The system is only as fast as the computer processing the entries on the blockchain. Off-chain scaling can overcome that obstacle because it allows creating an alternative protocol that sits on top of the blockchain and increases its functionality.
Some off-chain platforms let transactions happen off the blockchain and transfer some relevant details to the ledger later. This approach increases efficiency while boosting scalability.
Off-chain platforms can enhance blockchain scalability and could promote smart contract adoption in the process. However, there are still relatively few of them on the market, and all of them seem to work slightly differently.
It's too soon to tell whether the blending of off- and on-chain data sources could make the blockchain more suitable for meeting the demands related to smart contracts becoming widely utilized, but seeing how things pan out should prove fascinating.