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A Comprehensive Guide on Hybrid Smart Contracts

The term "Hybrid" is a reflection of its literal definition, which is "combination of two things," and today, the next part of the title, smart contracts, dates back to the "Third Blockchain Generation," which is more popularly known as Blockchain 3.0. In most cases, the most recent generation of blockchain will wrap around the progression of Ethereum and smart contracts.

After taking a quick look at what hybrid smart contracts mean in a more general sense, let's dive headfirst into what the phrase means in its more specific, technical sense. Hybrid smart contracts similar to blockchain contracts but differ from regular smart contracts in that they include an extra cherry and serve the same function as blockchain contracts. Blockchain and the Decentralized Oracle Network are the two decentralized networks that power the Hybrid Smart Contract. Hybrid Smart Contracts are powered by both of these networks (DON). The contract is referred to as a Hybrid Smart Contract since it is a fusion of two different networks.

Why Hybrid Smart Contracts Are Necessary

Blockchain smart contracts have been understood and utilized for some time to overcome the shortcomings of the centralized contract systems widespread in the business and legal ecosystem. Centralized contract arrangements are asymmetric because one of the parties involved always has an unfair advantage in the arbitration procedure. One party always has more resources, time, and knowledge of the infrastructure for contract enforcement. Under such a centralized contract system, parties judge their counterpart's dependability based on the counterparty's brand value. Consequently, collaboration through centralized contract systems occurred via brand-based trust, which lacked transparency and immutability.

Smart contracts on the blockchain have replaced brand-based trust with math-based trust. The blockchain depends on smart contracts' hosting, executing, enforcement, and custody procedures. Therefore, it operates only on a decentralized network that no participant or organization can undermine. Nevertheless, there is a flaw in smart contracts.

The Problem With Smart Contracts

Contracts that automatically maintain the transparency, fairness, and efficiency of contract obligations by executing an IF/THEN structure when criteria are satisfied are regarded as the most secure, immutable, and verifiable contracts. There is, however, a highly odd bug that restricts the functionality of smart contracts.

Traditionally, the Blockchain is the only source of the data that defines the requirements of a smart contract. This means that a smart contract can only read data that exists in a computer language that operates on the blockchain. The inability to understand off-chain programming language limits the connectivity of smart contracts to real-world data sources. The issue was remedied with the introduction of Oracles into the crypto ecosystem. As a middleware (software), Oracle might transform off-chain to on-chain data, making real-world data sources and systems compatible with blockchain smart contracts. However, because oracle is a centralized organization, its data might be corrupted. This raises a troubling question: what is the purpose of having a smart contract on a decentralized blockchain if its data is sourced from a centralized oracle that can be corrupted?

Doesn't this call into question the immutability and reliability of a smart contract? At this point, the need for hybrid smart contracts becomes apparent. Chainlink is a platform for hybrid smart contract development.

Possibilities With Chainlink Hybrid Smart Contracts

A Hybrid Smart Contract is an appropriate option when addressing the potential reliability difficulties that may arise from relying solely on a single centralized oracle. The hybrid smart contract preserves the fundamental principle of decentralization. It establishes a connection between the Blockchain network of the smart contract and a decentralized Oracle Network rather than connecting it to a centralized oracle (DON). Blockchain and DON are two very different computing environments, yet they share a focus on developing features that are unique among computer environments. They are brought into sync via a hybrid smart contract, which allows for the construction of an advanced application capable of doing something Blockchain, and oracle could not accomplish on their own.

Components of Hybrid Smart Contracts

An application is considered to be a hybrid smart contract if it consists of the following two fundamental components:

  • A smart contract— is a piece of software that can only be executed on the blockchain
  • Decentralized oracle network—

A decentralized network of oracle nodes is responsible for feeding information to on-blockchain smart contracts from data sources that are not part of the blockchain.

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How Hybrid Smart Contracts Work on Chainlink

Whenever a hybrid smart contract application wants off-chain data, the Blockchain sends a request for data/information to the Chainlink protocol. On the Blockchain, the Chainlink protocol generates a smart contract called Chainlink Service Level Agreement (SLA). The SLA contract creates three further subcontracts:

Order Matching: It forwards the Blockchain's data request to the validated oracle nodes and retrieves their bids on the request. The system then approves the correct number and kind of nodes to fulfill the data request.

Reputation is responsible for evaluating an oracle node's legitimacy and past performance to determine its reputation. Basis its judgment, it discards untrustworthy or disreputable oracle nodes.

Aggregation: The Aggregating contract gives the data request to the oracle nodes of the DON in an on-chain programming language. Therefore, the Chainlink nodes utilize "Chainlink Core" software to transform the on-chain language into an off-chain computer language that is readable by real-world data sources. The translated version of the request is then forwarded to an external API that retrieves the data from the source. After retrieving the data from the API, Chainlink Core transforms it back into on-chain language and delivers it to the Aggregating contract.

Here, things get interesting! The aggregating contract forwards the data request to various DON nodes, receiving data from numerous nodes. This data sourcing from several decentralized nodes enhances data credibility. For example, when the Aggregating contract receives data from five different nodes, and three offer one response and two deliver a different answer, it becomes simple to discover which two are problematic.

In this way, the Chainlink Aggregating Contract verifies the veracity of the received data and then reconciles the data to produce an accurate result. All security techniques used by a DON occur in an off-chain context. However, it employs various additional safe techniques and technology to meet the blockchain smart contract's high level of dependability and tamper-resistant assurances.

Uses of Onchain and Off-chain Computation in Hybrid Smart Contracts

To further comprehend the architecture of a hybrid smart contract, let's examine the duties of each of its components, namely on-chain blockchain computing and off-chain Computation conducted by a DON.

On Chain: Blockchain

  • It maintains a persistent ledger recording the custodial authority over users' assets. It interacts with private keys as well.
  • It performs irreversible value transfers between users and carries out the final settlement.
  • It ensures the correct operation of the DON's off-chain services by facilitating dispute resolution and imposing constraints.

Off-Chain: Oracle Decentralized Network

  • It retrieves data from external APIs, then validates, protects, and distributes it to blockchain-based smart contracts.
  • It performs many computations for executing blockchain smart contracts and Layer-2 solutions.

Capabilities of Hybrid Smart Contracts

Having defined hybrid smart contracts, let's investigate their expanded capabilities. A hybrid smart contract possesses all the characteristics of a blockchain and is further enabled by the decentralized services provided by a DON. Current and planned hybrid smart contract capabilities made available by off-chain computations include the following:

  • Keeper networks are the automation bots responsible for routine smart contract maintenance duties.
  • Off-Chain Reporting (OCR): refers to the scalable aggregations of responses produced by oracle nodes within a DON. These responses are given on-chain via a single transaction, reducing on-chain expenses.
  • Scalable Computation produces a high throughput and reduces the cost of contract execution. These contracts periodically synchronize on-chain using layer-2 technology.
  • The verifiable Randomness Function (VRF) produces cryptographic, secure, and verifiable random numbers that demonstrate the integrity of a process.
  • DON uses privacy-preserving oracle computing that employs zero-knowledge proofs (DECO), trusted hardware (Town Crier), and certain DON committees to make sensitive data discreetly accessible to smart contracts.
  • Fair Sequencing Services (FSS) enables decentralized transaction ordering by a preset idea of fairness. This inhibits frontrunning and value extraction by miners (MEV).

Our Smart Contract Development Services

As a blockchain development company, we create creative solutions for businesses that enable them to utilize the practical applications of blockchain technology. We make hybrid smart contracts with Chainlink development and write smart contracts for Ethereum, EOS, Hyperledger Fabric/Sawtooth, and other platforms. Our services for implementing smart contracts enable businesses with robust digital procedures to validate the terms of their legal relationships with third parties. These solutions assist businesses in achieving their security and transparency objectives while providing them with automation, backup, autonomy, cost-effectiveness, and precision.

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Our smart contract development services include the following:

Strategy for Smart Contracts: Architecture and design creation

Smart Contract Creation: End-to-end development services with adequate proofs of concept

Smart App Creation: We create smart contract software for E-Warranty, Health Wallets, Digital Certificates, Asset Traceability, and other applications. DEx, DeFi, Payment Digital Contract, and more APIs

Modern hybrid smart contract creation services benefit from finance, personal identification, supply chain, insurance, gambling, marketing, and governance.

Don't hesitate to contact our specialists if you want to explore the possibility of hybrid smart contracts for constructing a safe, scalable, confidential, universally connected, and dependable collaboration system through decentralized networks. We would be delighted to collaborate with you.

Conclusion

There are two approaches to value a hybrid intelligent contract. First, it increases the connectivity of Blockchain-based smart contracts to off-chain data sources and makes them capable of unique use cases that Blockchain does not support by design. Moreover, extending cryptographic security to real-world data systems enhances their use. As previously indicated, the participation of centralized authority is a flaw in the contract systems of today. These contract agreements are predicated on brand credibility.

In contrast, a hybrid smart contract is a logic-based trust because it promotes collaboration via decentralized networks that are secure, scalable, confidential, globally connected, and trustworthy. It is commonly believed that the blockchain ecosystem has merely touched the surface of what is to come. Its evolution will be primarily influenced by the broad applicability of hybrid smart contracts.

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