Why Data Indexers Are Key to Bringing Off-Chain Data On-Chain

Blockchain technology has transformed the way that data can be stored, processed and transferred, facilitating the rise of decentralized processes that eliminate the middleman, boosting efficiency and reducing costs for stakeholders.

However, as revolutionary as blockchain has proven itself to be, it faces a key challenge in its inability to communicate with the outside world. That’s because blockchains are isolated, or closed networks that cannot communicate with other computer systems. Overcoming this isolation is key for blockchain to progress and become the foundation of every kind of application.

The decentralized and trustless nature of blockchains creates a fundamental challenge when it comes to bringing “real world data” on-chain. The challenge is, how can a decentralized system that’s designed to function in an immutable way without relying on trust, integrate with data from centralized or external sources? By design, blockchains are unable to access external information that’s created off-chain.

The closed nature of blockchains is designed to ensure the security and trustworthiness of decentralized networks, but many applications, especially those that use smart contracts, require data that’s created off-chain to be truly useful. Smart contracts are programs that automatically execute actions based on a predefined trigger, without the need for an intermediary, so it’s easy to see why they can benefit from knowing what’s happening in the real world.

For example, a decentralized betting application can facilitate a bet between two strangers on the outcome of a soccer match, placing the funds each party deposits into an escrow smart contract. The funds will then be released to the winner, once the smart contract learns the final score of that game. But how can it be certain what the final score really is, without relying on trust? If it uses an arbitrator, that unfortunately removes the “de” from its decentralization.

From gambling to financial services, to investing and real estate and everything else in between, the necessity of real-world information is paramount to almost every industry.

How Data Oracles Fixed Blockchain Isolation

The solution for blockchains to connect to real world data is oracles, which act as a kind of bridge between decentralized networks and the off-chain data they need to know. Blockchain oracles can be thought of as intermediaries, giving smart contracts the ability to access real-time data streams and events that live outside of the blockchain network they’re hosted on.

Such oracles typically aggregate data from multiple providers that are incentivized to provide honest information. They validate the information is correct, and then deliver it securely to the blockchain, where it can be used by smart contracts as a trigger. In this way, oracles forge a connection between blockchains and what’s happening in the real world.

Real world data can make smart contracts much more useful, allowing them to be applied to a much wider range of use cases and applications than those that can only use on-chain data. In addition to the aforementioned betting app, other examples include a decentralized insurance protocol that uses real-world weather data to trigger payments to farmers affected by drought, and the buying and selling of “tokenized” real-world assets such as stocks and bonds, informed by the most up-to-date prices from traditional financial markets.

The use of data oracles has already become widespread in the Web3 industry, with some of the best known services being Chainlink, Pyth Network and Flare. However, the challenge of getting off-chain data on-chain isn’t restricted to just providing a way to eliminate the need for trusted authority. There’s also a need for that real world information to be organized, indexed and made accessible.

Organizing real world data is vital, because blockchains can be incredibly inefficient in some situations, due to the way they store information in a sequential way, ordered by the time that data is created. With blockchains, information is stored in “blocks” (hence the name) that are posted on-chain one after another. As more data is added to the blockchain, it becomes progressively longer, and the information becomes more and more spread out over time.

The result is that this information becomes a nightmare to access. Searching for historical data in a specific block, for example, is already time consuming, but the complexity of this becomes exponentially more difficult when an application needs to aggregate information spread across multiple blocks. Yet this is what many decentralized applications need to do in order to process more complex blockchain logic. Some kinds of dApps, such as DeFi applications, may even have to process data across multiple blockchains.

Organizing Real World Data On-Chain

The inherent disorganization of blockchains necessitates the use of blockchain data indexers, and this is why projects like SQD, formerly known as SubSquid, are just as important to bringing off-chain data on-chain as the data oracles themselves.

SQD is the creator of a decentralized data indexing service and network that helps to make blockchain data accessible by indexing the information they store. In some ways, it can be thought of as similar to the index of an encyclopedia – it categorizes blockchain data in such a way that it can be found almost instantly, facilitating queries and data retrieval tasks for smart contracts. Because of its modular architecture, it can facilitate off-chain data integration with blockchains, effectively fulfilling the role of data oracle and simultaneously indexing the real-world information it provides to the blockchain.

SQD’s data index can be hugely advantageous for blockchain dApp developers that require access to off-chain data. Using its SDK, developers are able to specify how that information should be stored and create a customized GraphQL endpoint that enables their dApps to access it quickly, eliminating the headaches and latency associated with querying sequential blockchain data. As a result, their dApps become much more responsive.

SQD’s data indexing service has been optimized for latency, and it’s equally proficient at accessing information in real time as it is at tapping into historical blockchain records.

The platform has become popular with dApp developers, not only because it simplifies blockchain data access and boosts responsiveness, but also due to the way it abstracts away the need for coding logic to query the blockchain itself. Developers can use a variety of templates and quickstart guides to define how off-chain information from a blockchain should be retrieved, indexed and structured, making it instantly queryable.

While it’s not the only blockchain data indexing service in town, SQD has proven itself to be much faster than alternatives like The Graph and Snowflake’s NXYZ, capable of processing, querying and retrieving off-chain data between 100 and 1,000 times faster than those competing platforms. As a result, it has reduced the time it takes to synchronize more complex requests from several days to hours or even minutes, making off-chain data far more practical in blockchain applications. As another benefit, the fully decentralized nature of SQD makes it much faster than alternatives, enabling dApp developers to reduce their backend infrastructure costs by up to 90%.

Real World Data Can Decentralize Everything

For dApp developers, real world data is extremely valuable, paving the way for smart contracts that can automate the functioning of just about any application they could conceive. To do this, they must first bring that information on-chain, and once it’s there, they need a way to query it and retrieve that information with the lowest latency possible.

By killing two birds with one stone, so to speak, SQD is paving the way for blockchain to enable decentralization in every kind of industry and application.