Hybrid smart contracts can bring tamper-proof and immutable properties to the blockchain ecosystem while leveraging secure off-chain oracle services to attain complex capabilities such as correct order, confidentiality, connectivity, and sequencing.

Since the rise of blockchain, smart contracts have been driving the Web3 industry towards global adoption. These decentralized smart contracts have given sovereignty to Web3 protocols, eliminating the need for intermediaries to execute operations. While smart contracts are powerful, they depend on oracles to connect with external data sources like timestamps and market prices. This integration allows for off-chain computations on on-chain protocols, which otherwise would not be possible.

The constant improvements in the integration of smart contracts with off-chain data have led to a new way of building smart contracts, known as “Hybrid Smart Contracts.” In this article, we’ll briefly discuss the introduction of hybrid smart contracts and their importance.

What is a Hybrid Smart Contract?

A hybrid smart contract enhances traditional smart contracts by combining an on-chain blockchain ecosystem with off-chain data and computation, surpassing the capabilities of an oracle. These new contracts utilize a decentralized oracle network (DON), enabling agreements using off-chain data while retaining tamper-proof and immutable properties.

Nick, the co-founder of Zap Protocol, explained to Cointelegraph that “smart contracts by themselves could easily complete simple calculations but were unable to perform complex calculations.”

Hybrid smart contracts can access off-chain data through decentralized oracle networks, enabling on-chain protocols to perform complex financial computations. This also enhances blockchain’s potential to perform operations that were previously limited to code only.

Problems in Smart Contracts

At its core, blockchain is a computational infrastructure that provides highly collaborative trustworthiness. The most common way to establish trust collaboratively is through contracts, which define the legal and business obligations of every participant, along with the rewards and penalties for their actions.

The data defining the legal obligations and conditions of a smart contract generally comes from the blockchain only, meaning a smart contract can only read on-chain data. Unfortunately, this mechanism is far from reality, particularly when one participant has an asymmetrical advantage. For example, a person with early information on market influence can prolong the arbitration process.

Moreover, oracles are centralized platforms, so their data can be compromised. When smart contracts source data from centralized oracles, the benefits of decentralized blockchains cannot be fully realized.

How Hybrid Smart Contracts Work

A hybrid smart contract consists of two components:

1. Smart Contract: Code that runs exclusively on the blockchain.
2. Decentralized Oracle Network (DON): Secure off-chain services that support the smart contract.

The combination of these two components creates a seamless and secure system where users can participate and perform transactions in unique ways, enabling use cases that would not have been possible through on-chain code alone due to financial or technical constraints. Hybrid smart contracts utilize two distinct computing environments:

• On-Chain: Code runs in a secure and limited-functionality blockchain environment with a high degree of execution and storage determinism.
• Off-Chain (DONs): Offers infinitely more flexibility in data accessibility.

Both environments have different roles. Blockchains maintain a ledger providing custody of assets and perform final settlements. Decentralized oracle networks collect, check, and transfer data from external APIs to smart contracts on Layer 2 protocols and blockchains. This includes price feeds where asset price data is collected from thousands of exchanges, weighted, and relayed to the blockchain. DONs maintain the log event and inform off-chain nodes, which gather data from the log event, verify it, and deliver it back on-chain for smart contract use.

The purpose of integrating decentralized oracles with smart contracts is to ensure that all protocols can access off-chain data without compromising security and decentralization.

Importance of Hybrid Smart Contracts

In the financial world, smart contracts are gradually overcoming imperfections using various techniques and methods. These contracts replace brand-based trust with various forms of math-based trust. With DONs integration, we can perform a variety of off-chain computations on behalf of the smart contract. Some tasks achieved by DONs include:

• Scalable Computation: Low-cost and high-throughput smart contract execution using L2 protocols.
• Off-Chain Reporting (OCR): Aggregation of multiple nodes on DONs delivers large amounts of data in a single transaction.
• Keeper Network: Automation bots perform regular maintenance tasks for the smart contract, activating it when necessary.
• Fair Sequencing Services (FSS): Better utilization of miner extractable value (MEV).
• On-Chain Contract Privacy: Secure communication between contract logic and settlement output.

The Role of Hybrid Smart Contracts in Global Industries

DONs unlock numerous applications for smart contracts that require security and scalability. They are particularly useful in industries such as gaming, which requires high throughput and real-time decision-making, and identity verification, which demands automated and secure processes. In open financial markets, DONs integration allows smart contracts to define rules for buyers and sellers, price services, and perform advanced features like KYC verification, fair transaction ordering, and high-speed off-chain processing.

Final Thoughts

Ultimately, hybrid smart contract architecture will leverage off-chain services to enhance blockchain capabilities by utilizing secure off-chain computations. This approach will broaden the range of mathematical operations applicable to financial and identity-related transactions on the blockchain. As you embark on developing hybrid smart contract applications, it’s crucial to also consider the smart contract audit cost. Ensuring thorough auditing can prevent costly vulnerabilities and ensure the security of your applications. For guidance on building hybrid smart contracts, refer to the Chainlink documentation.