What Is the “Oracle Problem” and How Does It Affect Complex Financial Smart Contracts?

The "oracle problem" is a fundamental challenge in blockchain technology. Blockchains are deterministic, closed systems, unable to access external, real-world data on their own.

However, complex financial smart contracts, like derivatives, absolutely depend on this data (e.g. asset prices, interest rates). The problem is that the connection to this data, the oracle, becomes a centralized point of trust and a potential point of failure.

If the oracle is compromised or provides bad data, the otherwise secure and deterministic smart contract will execute incorrectly, undermining the entire system's integrity.