What Are Hybrid Contracts and Their Role in Building Web 3.0?

The blockchain universe is quickly progressing, with millions of new individuals and institutional players joining it every year. The fuel behind blockchain use is a smart contract – a self-executing, automated solution powering all blockchain transactions. However, smart contracts have one significant limitation: they act only on-chain, meaning that users can’t transact with their help with off-chain users.

The issue was resolved some time ago with the help of blockchain oracles – gateways that ensure a robust and safe connection between on-chain smart contracts and off-chain data sources. Still, oracles also revealed some limitations in use, requiring more innovative and flexible solutions for on-chain and off-chain communication.

This is where the hybrid smart contracts (HSCs) came in handy. They were designed to connect the blockchain’s on-chain code and off-chain data with advanced oracle-type mechanisms – decentralized oracle networks (DONs). HSCs promise to resolve the most pressing problems surrounding the use of centralized oracles and on-chain/off-chain data computations. Thus, in this article, 4IRE experts reveal the basics of the HSC technology and explain how it may be effectively applied to sustainable, effective blockchain product development. 

Smart Contracts Explained in Simple Words

To understand the HSC mechanics, we need to revisit the traditional concept of smart contracts first. To date, the smart contract technology introduced by the Ethereum network back in 2016 has been considered the most robust, immutable, and safe way of transacting in a blockchain, which allowed users to preserve fairness and transparency in their operations while at the same time transacting efficiently. 

Here’s the process of smart contract execution in a nutshell:

• A buyer and a seller agree on specific terms of their contract
• They feed that data into a smart contract, programming it for the IF/THEN execution mode 
• The contract’s conditions are written down into the blockchain’s code, thus being transparent and immutable 
• If the buyer and seller meet the contract’s terms, the contract is self-executed, enforcing its terms upon the parties 
• If the contractual terms are not met or are violated, the contract is canceled

This functionality of smart contracts has enabled numerous users to use safe and transparent contracts with numerous partners without fearing non-fulfillment of the terms. As the system works automatically and cannot be forged or manipulated, all transactions occur fairly and don’t bear the counterparty risks. 

With the recent advancement and expansion of the blockchain world, a significant limitation of smart contracts to on-chain data surfaced. Their problem is the ability to read and process only on-chain data, limiting user transactions to only one blockchain. Thus, with the emergence of hundreds of alternative blockchains, the interoperability issue escalated, giving rise to oracle use.

What’s an Oracle? 

Oracles emerged in the blockchain market as a viable solution to the smart contracts’ inability to read the off-chain programming language and connect to real-world data. Technically, oracles represent the middleware that translates off-chain data into the on-chain-understandable programming language so that smart contracts can process it. In this way, off-chain data is fed into the blockchain and informs smart contracts’ effective execution. 

While oracles represent a great solution to blockchain interoperability, they are still centralized systems, which compromises the decentralized nature of blockchains. Oracles work well and advance the breadth of user operations. However, the sense of using decentralized public ledgers is lost as users still need to pass their data through a centralized, business-owned gateway. Thus, users utilizing the services of oracles may have reasonable concerns about data leakage and compromises. The next step to resolving the interoperability issue was a hybrid contract. This technological solution minimizes the downsides of oracles while at the same time ensuring hassle-free on-chain/off-chain computations.

Hybrid Contract Definition

Hybrid contracts target the issue of oracles’ centralization by creating the decentralized oracle network (DON). In this way, data transparency and integrity are managed, giving users the expected degree of decentralization and security within the blockchain. 

A hybrid smart contract connects a specific blockchain to a DON, thus ensuring the complementarity of their operations. This contract type synchronizes the two and helps them build sophisticated applications that neither the blockchain nor the DON can accomplish on their own. 

The first hybrid smart contract emerged based on the Chainlink protocol. Its operations take place as follows: 

1. The Chainlink protocol generates a smart contract native to this blockchain, titled Chainlink Service Level Agreement (SLA). 
2. The SLA generates three sub-contracts. The reputation contract verifies the oracle node’s authenticity by analyzing its prior transactions. If the oracles don’t pass the test, they are neglected by the system. Those that pass the reputation test are used for on-chain/off-chain communication. The order-matching contract sends out the transaction requests to the chosen nodes and collects their bids for this service, then choosing some nodes for processing its data request. The final, aggregating contract sends the data to the oracle, which is then translated into the off-chain language via the Chainlink Core software, processed off-chain, and then translated back into the on-chain language to be fed to the aggregating contract for the transaction’s completion. 

Interestingly, the aggregating contract sends data to multiple nodes in the DON and receives the output from several nodes as well. Thus, when the dominant portion of nodes gives one answer and several nodes give a different output, the system qualifies the erroneous nodes as faulty and doesn’t use them in the future. In this way, Chainlink’s hybrid smart contracts work as a self-perfecting ecosystem, ensuring a high degree of data credibility to users.

From Oracles to Hybrid Smart Contracts

Here comes the key distinction between the traditional oracle use and the application of hybrid smart contract-powered DONs. When the off-chain and on-chain computations take place with the help of oracles, data from off-chain web servers enters the blockchain directly, without credibility checks (which takes place directly in the blockchain).

With a hybrid smart contract, the situation Is different – DONs function as an isolated off-chain environment where all data checks and data verifications occur. After the process is completed, a single, verified output is fed into the blockchain.

As a result of such dual architecture, the hybrid contracts successfully preserve the blockchain’s immutability and tamper-proof nature of transactions. They also enhance confidentiality and connectivity within the blockchain ecosystem, giving users more flexibility, while businesses deploying new blockchains can enjoy greater scalability of their operations. 

On-Chain and Off-Chain Computation

Now let’s return to off-chain and on-chain computation layers to clarify the significance of hybrid smart contracts. Why is ensuring the connectivity of these two layers so important for blockchain, and what computations take place within each layer? 

On-chain data and computations that the system performs with it relate to everything existing within a specific blockchain. In a nutshell, most blockchains exist as isolated systems, achieving data immutability and advanced security mostly due to such isolation. Thus, the primary functions of on-chain data in the blockchain typically involve: 

• Interaction with private keys 
• Custody of users’ assets 
• Blockchain ledger’s maintenance 
• Processing of smart contract-based operations within the blockchain 
• Ensuring the proper functioning of DONs via dispute resolution and audits 

Off-chain operations with data take place within the DON, which is technically not a part of the blockchain. The DON’s responsibilities within the process of hybrid smart contract execution include: 

• Data validation from external APIs for its further delivery to on-chain smart contracts 
• Off-chain Layer-2 data computation

When these operations are effectively matched and translated into the blockchain-understandable and real-world-comprehensible forms, on-chain smart contracts can be executed based on real-world data without compromising the blockchain’s guiding principles and security standards. 

Hybrid Smart Contracts and Web 3.0

Hybrid smart contracts are expected to play a prominent role in the establishment of Web 3.0. To realize their potential, one should first note the prominent features of the Web 3.0 project: 

• Also known as Semantic Web, Web 3.0 promises full decentralization of Web data
• Users of Web 3.0 will be able to access data from anywhere
• Web 3.0 heavily relies on AI and machine learning to improve user experiences
• It promises much more personalized browsing experiences and websites’ automatic customization
• Along with customization, Web 3.0 focuses on better user data security and privacy

Web 3.0 networks will achieve these goals due to their operation through decentralized blockchain protocols, with smart contracts used to power all operations within the ecosystem. Hybrid smart contracts can thus help users collaborate with multiple Web 3.0 resources without addressing interoperability limitations and cross-protocol problems.

Implications of Hybrid Smart Contracts for the Blockchain Industry

With the introduction of hybrid smart contracts, the blockchain industry is indisputably evolving. This new technological solution has made many operations securer, more scalable, and more efficient, thus giving the blockchain users a broader toolkit for smart contract generation and execution. 

The most notable benefits of hybrid smart contracts are as follows:

• Automated keeper bots can perform smart contract maintenance
• Off-chain reporting has become possible, delivered on-chain via a single transaction, and reducing the on-chain costs of such transactions manifold
• The blockchain throughput rises exponentially due to scalable computations and the use of layer-2 technology 
• DONs use the zero-knowledge proof protocols (DECO) and trusted hardware to preserve a high degree of user data privacy and security
• The blockchain transactions’ fairness is guaranteed with the help of Fair Sequencing Services (FSS), minimizing the risks of frontrunning

With all these benefits, hybrid smart contracts promise to become the future of blockchain development. So, if you’re interested in launching a new blockchain project, 4IRE can provide blockchain development and consulting services to guide you through the entire process.