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What Are Hybrid Smart Contracts Used For? A Detailed Guide by Coinhunt

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    Coinhunt CC

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    8 min read

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Hybrid smart contracts are responsible for combining code running on the blockchain with off-chain data and computations provided by decentralized oracle networks. Forms of social integration and advanced economic computing work on the blockchain thanks to hybrid smart contracts. Hybrid smart contracts develop trust models across various decentralized services to establish trust. In this way, we can use next-generation hybrid blockchain-based applications with all the features needed in the future to increase efficiency.

Blockchain Oracles

Blockchains have provided a high level of security by transferring contract placement, execution, and storage mechanisms to software logic running on a decentralized network. Increasing the types of operations possible on blockchains has led to the introduction of hybrid smart contracts and oracles. Oracles enable smart contracts to control off-chain events, initiate actions, and retrieve information from the outside world. Oracles are used for computations that are impossible or impractical to perform on the blockchain.

Oracles have significantly increased the types of transactions smart contracts can handle. Decentralized oracle networks like Chainlink support hybrid smart contract protocols like Synthetix or financial service protocols like Aave, making external financial market data available on the blockchain. This rapid growth of DeFi, the success of stablecoins or the increase in transaction volumes of leveraged trading markets has been thanks to oracles.

How Hybrid Smart Contracts Work

The hybrid smart contract is an application that consists of two variants. The first piece has smart contract code running only on the blockchain, while the second piece has a decentralized oracle network and secure services outside the blockchain that support the smart contract. The two components interact securely and seamlessly with each other, creating a single hybrid smart contract application. As a result, many new use cases are created on the blockchain.

Hybrid smart contracts are developed to be unique for each environment. Therefore, a hybrid smart contract is needed to synchronize two different computing environments to create a unique application that neither the oracle network nor the blockchain alone can achieve. The code in the blockchain is executed exactly as written in the algorithm, and the results are immutable and permanently stored. The decentralized oracle network provides more functional, flexible, and usable data outside the blockchain.

Decentralized Oracle Networks (DON) provides high reliability and fraud resistance thanks to the guarantees provided by smart contracts. But the advantages of DON are not limited to security. DON provides the flexibility needed for data validation, infinitely complex data collection, and computation in an open world. An unlimited number of DONs in a blockchain architecture can run in parallel with each other to provide custom-built services. This structure is essential for all networks and dApps.

Combining On-chain and Off-Chain Information

On-chain information is provided by the blockchain. Transactions made by users on the blockchain are irreversible and all have a precise record. A permanent ledger is maintained on the blockchain that interacts with private keys.

Off-chain information is provided by the decentralized oracle network. Smart contracts running on blockchains, Layer-2 solutions, external APIs, and dApps receive data from oracles, validate data, and store and transmit data. Oracles run the appropriate computational types for smart contracts.

Hybrid smart contracts aim to combine blockchain-based code with off-chain decentralized oracle networks to create more functional blockchain-based applications. The performance of all smart contracts improves significantly when DONs and hybrid smart contracts are well designed. Decentralized services fall into two broad categories: off-chain data and off-chain computing.

Off-chain Data

Decentralized oracle networks allow you to develop hybrid smart contracts based on specific pieces of data. It's best practice to use an oracle to transfer data types off-chain to the blockchain.

API: Premium data from secure APIs, ranging from traffic conditions to the results of basketball games, and can even include information from IoT devices. These data can be verified using several different sources, or the average of data from several different sources can be calculated.

Price feeds: Data on asset prices collected from hundreds of different exchanges, weighted by volume, free of errors and deviations.

Proof of Reserve: They provide precise information on current reserve balances providing tokenized assets. For example, the value of the USD collateral used for USDT is such data.

Off-Chain Computing

Decentralized oracle networks do a lot of computation outside of the blockchain on behalf of the smart contract. Here are a few of the off-chain calculations that are scheduled at the request of smart contracts:

  1. Fair Sorting Services (FSS): Based on the predefined concept of fairness in the smart contract, pre-processing of transactions can be prevented and transactions can be sorted in a decentralized manner.
  2. Verifiable Random Function (VRF): Verifiable and secure random number generation powered by a cryptographic algorithm. Thanks to open-source codes, the integrity of the process can be verified. For example, in PancakeSwap Lottery, draws are made in this way.
  3. Off-Chain Reporting (OCR): Oracle node responses can be delivered to the blockchain in a single transaction to reduce the cost of transacting on the blockchain. The report is aggregated off-chain.
  4. Scalable Computing: Low-cost contract code and high-performance software execution technology for periodically synchronized smart contracts on blockchains using L2 technology.
  5. Cross-Chain Interoperability Protocol (CCIP): This protocol allows oracles and smart contracts to run on different blockchains.

Uses of Hybrid Smart Contracts in Global Industries

Decentralized oracle networks enable you to use an advanced hybrid smart contract architecture that can provide endless integration with your business. These contracts provide universal and secure automation between independent organizations working on different blockchains and software. Chainlink has overcome the current technical limitations of smart contracts with these two technologies. Thanks to hybrid smart contracts, existing infrastructure can be integrated into blockchain networks with minimal backend changes.

Oracles support many smart contract applications that require scalability and privacy. Oracles are used in many financial applications and games that require real-time decision-making and high bandwidth. Decentralized transaction sequencing and verifiable randomness can create unprecedented use cases for important issues such as transparency in social systems or mathematical economic justice. Some of the industries that already use or will certainly use hybrid smart contracts are:

Marketing: After creating performance targets, marketing campaigns that distribute real-time rewards can be created based on data. Decentralized oracle networks and smart contracts can define a seamless payment model, verify the success of performance indicators, and transparently perform confidential calculations based on customer data and broader market trends for enhanced campaign evaluation.

Insurance: Parametric insurances can be created for two-way agreements against predefined situations. Smart contracts can handle claims processes and pay premiums. Decentralized oracle networks that can perform risk assessment calculations can produce complex results, reducing contract costs.

Finance: Hybrid smart contracts can define interaction rules for buyers and sellers. Using external data, DON can conduct market research and set prices for goods and services.

Identity: Decentralized oracle networks can perform computations that verify the user's personal information without revealing it to the public, the other party, or anyone else and storing it in an external system. With confidential and automatically verifiable information, an easy KYC process can be passed for each platform. Platforms such as Civic and Blockpass provide similar services.

Supply Chains: Multilateral trade agreements can be created that digitize product lines and products, and automate actions. With decentralized oracle networks, customer identities can be verified, cargoes can be tracked, and product quality can be monitored. Smart contracts can also define payment terms, parties' obligations, and penalties. Privacy-sensitive external data and computing data from blockchains, IoT networks, web servers, and corporate backends can be used.

Gaming: Blockchain gaming platforms give users full ownership of in-game assets via NFTs and automate the delivery of rewards. Hybrid smart contracts can contribute to this automation, proving that all players have an equal chance of winning. Randomness is provided by oracles to ensure impartiality. Augmented reality and real-world data can be leveraged by integrating IoT sensors into gaming dApps. To achieve higher performance, oracles can be made to handle certain game functions outside of the blockchain.

Management: Hybrid smart contracts can be used to fairly manage the assets in the pool. After the entire management structure is defined by smart contracts, the decentralized oracle network provides calculations and external data to calculate total payments, distribute profits and reduce variance.

The Role of Hybrid Smart Contracts in Web 3.0

Hybrid smart contracts are essential for the future of decentralized applications and systems that make up Web 3.0. Hybrid smart contracts reliably combine a coded agreement on a blockchain with a system that proves something about what happened in the real world. The combination of an on-chain agreement with reliable data proving off-chain events makes a smart contract truly smart. For real-world connectivity, smart contracts need DONs.

Web 2.0 consists of centralized applications run by major actors with the power to manipulate and exploit users' valuable data. We know what these apps are and we use them every day. Working with blockchain protocols, Web 3.0 provides individuals with full control and transparency over their assets and data. Chainlink 2.0, hybrid smart contracts, DONs, and oracles are the most valuable parts of the next steps for Web 3.0.

DONs can transmit to the blockchain via hybrid smart contracts, providing all services that the blockchain does not inherently support. Able to build off-chain services using existing systems and data, oracles provide scalable, secure, and customizable applications both on-chain and off-chain. The broad applicability of hybrid smart contracts provides automated algorithms suitable for all industries.

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