Smart contracts and blockchain work hand-to-hand to perform various financial activities, such as sending and receiving monetary forms of value, as well as performing simple calculations. However, a real test for smart contracts would be implementing them into a real-world case study, which shows some of the weaknesses of modern smart contracts - they can’t access off-chain data, perform complex calculations or generate random numbers on their own.
The introduction of oracle networks solves this issue, as oracles can add the needed complexity and verified randomness, which current smart contracts, in their majority, cannot. Hybrid smart contracts use the already decentralized oracle network to launch and perform smart contracts on blockchains without sacrificing the decentralization benefits of the technology.
For instance, some of the largest ad space sellers – Facebook and Google, use the Vickrey-Clarke-Groves (VCG) algorithm to charge for ads on their networks. However, being a complex computational algorithm, VCG can’t run cost-effectively on a given blockchain. With hybrid smart contracts, oracle networks can send the auction bid to an off-chain computational site and bring back the results, while being deployed on a blockchain.
Online gaming and gambling sites already use hybrid smart contracts as a random number generator service, which turns out to be sometimes even more efficient than its non-random counterparts. For example, eBay uses the so-called English auction mechanism, which closes the auction automatically at a fixed time.
However, eBay users know the pain of bidders racing for a given item in the last minutes of an auction, while performing little to no action in its beginning. Hybrid smart contracts can introduce the so-called candlestick auction mechanism, randomizing the auction’s end time. This way, buyers will have to place their bets early in the auction, as there will be no clear indication when the auction will end.
But one of the biggest advantages of smart contracts over traditional systems is the trustless approach to enforcing contracts on the blockchain. Each contract comes with a set of pre-defined rules, which have to be reached for the smart contract to be executed. The lack of an external court system to enforce the contract means more peer-to-peer transactions can be governed by contracts rather than trust.
The implementation of trustless hybrid contracts can also close any potential loopholes for any given law to be enforced. For instance, the U.S Centers for Disease Control and Prevention (CDC) issued an Agency Order titled Temporary Halt in Residential Evictions to Prevent the Further Spread of COVID-19. The order, which grants tenants the right to housing after suffering from COVID-19-related financial problems, was issued on September 4, 2020, and is still in action.
The Order prohibits residential landlords nationwide from evicting certain tenants through June 30, 2021. However, landlords and tenants across the United States argued that protecting some of the tenants, which meet a specified set of criteria, is unfair towards the tenants who pay their rent on time. Technically, regularly paying tenants can stop paying landlords' rent due to “COVID-19-related fiscal shortage”, which, if declared and accepted, puts them on par with illicit tenants.
In this case, hybrid contracts can be used to minimize the human factor in deciding whether or not a tenant falls under CDC’s eviction ban Order. For instance, an oracle can bring out information about a person’s inclination about receiving government housing, as well as income loss figures, or whether or not the person was eligible for Economic Impact Payment (stimulus check).
The smart contract will decide in a trustless manner whether or not the person is falling under the Order’s rules.