One of the challenges of managing a blockchain is dealing with the divide between off-chain and on-chain data. An oracle is a tool that can be used to connect real-world information with blockchain activities, making it easier to use blockchains in everyday life. Oracles offer a wide range of possibilities for users of blockchains.

What Are Blockchain Oracles?

Blockchain oracles are computerized systems that send outside data to a blockchain in order to automatically complete transactions.

An oracle is a third-party service that can be used to connect to a blockchain and automate processes. Oracles take real-world data, like temperatures, deed transfers, or prices of other cryptocurrencies, and communicate this data to the blockchain. Oracles can then tell the blockchain to enact a smart contract based on this data.

Oracles are tools that can send and receive data to and from the blockchain. They can be centralized or decentralized, depending on the task they are needed for. Oracles are very flexible tools that can be used in many different ways by blockchain users.

The problem the Oracles seek to solve

• Blockchains are designed to be deterministic. That is why, in principle, we cannot make on-chain API calls. We must do this through services such as Chainlink. Decentralization requires that all nodes in a system confirm the same result. There should be no ambiguity. Common APIs may not meet the no-change requirement. For example, Juan sends Carla the equivalent of $10 in ETH. Then use a off-chain API to get the ETH/USD value at that time. Transactions are recorded at a node on the blockchain and other nodes must validate the transaction by calling the same API that provided the ETH/USD value. However, this API service is likely to be dynamic and change the value within a minute. So if a single validator calls the API and gets a different value, the transaction will not validate. This is why blockchains need to be deterministic, so that validation can happen: if we replay every transaction from the first block, then we should be able to get the same results (this amazing video was the source of inspiration for this example).
• The Oracle problem. An Oracle is only as good as the data sources it uses. A single source of truth would be insecure and violate the goal of decentralization. An API provided by a private company, for example, could be manipulated or hacked to pursue particular objectives. Even a source like government agencies or big tech companies could, and have been, hacked and manipulated. (see this and this). This could be solved by a decentralized oracle that gets the information from various data sources. If one source fails, the others will continue to provide the required information.

How Do Blockchain Oracles Work?

Blockchain oracles are computerized systems that act as a layer between the blockchain and an external data source, in order to query desired information.

After information is authenticated by the oracle, it is sent to the blockchain. The blockchain can then use this information in various ways, such as validating a smart contract after certain data is present. Oracles can also be used to send information from the blockchain out into the real world, or to perform other types of transactions and activities within the blockchain.

How to send custom off-chain data to the blockchain

Chainlink, for example, allows you to interact with off-chain data with API calls (see here). The service advertises itself as being able to call any API (read here for how to make GET requests) :

The Chainlink documentation provides the tools you need to make your contract consume publicly available data, whether your contract requires sports results, the latest weather, or any other publicly available data.

If we want to get data from an external API using Chainlink, we can do so by making a request to the API. However, we need to be careful not to fall into the Oracle problem, which occurs when we have to rely on a single source of truth for the data we want to get. This can be a problem because it means that we are vulnerable to changes made by the company that provides the data.

Why Are Blockchain Oracles Important?

Seen as a way to confirm data authenticity, blockchain oracles can either be a private entity or a smart contract. Blockchain oracles can be used to trigger smart contracts when the correct data is inputted into the system. This is done by the oracle querying an off-chain data source and gets a response that is signed by the oracle. The signed response is then sent back to the blockchain, where the smart contract can verify the signature and act accordingly. This can be used to do things like automatically send a payment when a product is delivered. In other words, Blockchain oracles are used to manage data between blockchain applications and off-chain data sources. They are important because they allow blockchains to change and react to external events.

Applications of Oracles

An oracle can be used to transfer data from the blockchain to the real world in order to complete a contract, like exchanging cryptocurrency for a real-world item like a vehicle.

Agreements that are not binding can be made using oracles. For example, if you bet 10 tokens that your team will win, and they do, the oracle will automatically transfer the tokens to you.

Oracles can help manage risk in derivatives, insurance, and other areas. For example, a farmer could use an oracle to keep track of the weather and ensure that they would receive insurance money if a certain amount of rain did not occur within a specified timeframe.

Oracles can be useful for cryptocurrency investments as they can monitor cryptos, stock prices and foreign exchanges, and then execute trades based on these external changes. This can make it easier for investors with a diversified portfolio to keep track of their assets.

Oracles play an important role in connecting blockchain technology with real-world events. This creates opportunities for blockchain to be used in everyday life.

Types of Blockchain Oracles

Most blockchain oracles are distinct from each other because they have so many uses. Oracles are usually categorized based on how they function. It’s fairly common for an oracle to fall into multiple categories, such as outbound and software. Knowing all the different types of blockchain oracles can help you find the right one for your needs.

Software Oracles

A blockchain oracle is a type of software that connects digital sources of information to a blockchain. Blockchain oracles are most commonly used to access data from things like websites, databases, and servers. They often focus on publicly available information from the internet, such as flight information, exchange rates, and market fluctuations.

Hardware Oracles

A hardware oracle is a piece of equipment that uses sensors to collect information and relay it to a blockchain. This information can be used to trigger a smart contract. Hardware oracles are complex, but can be very useful because they can directly translate real-world events into a smart contract.

Inbound Oracles

An outbound oracle, on the other hand, is one that takes information from the blockchain and communicates it to the real world. People use the terms “inbound” and “outbound oracles” to refer to the direction of information flow. An inbound oracle is one that brings real-world information onto the blockchain, which can be useful for affecting how a blockchain is functioning based on real-world situations and external data. An outbound oracle is one that takes information from the blockchain and communicates it to the real world.

Outbound Oracles

Outbound oracles transfer data from the blockchain to another system. This is the opposite of how inbound oracles work. Inbound oracles bring external data to the blockchain. With outbound oracles, you can tell other systems to do something based on information from the blockchain. The way the oracle is set up determines what you can tell the other system to do.

Centralized Oracles

The term “centralization” can refer to both the controlling entity and the sole source of information. An oracle can be considered centralized if a single person or group sets up all of its information sources and actions. The oracle is also centralized if it only collects data from a single source. Some degree of centralization is inevitable in most blockchain oracles. However, centralization can be risky, because a single piece of bad information, or a single malicious actor, can harm the whole system.

Decentralized Oracles

Decentralization of oracles can reduce the risks associated with them because they will not have to rely on any one party being accurate or acting in good faith. However, it can be difficult to implement decentralization in an oracle. Decentralized oracles may require multiple network participants to reach consensus before creating smart contracts, and they may also benefit from having multiple data sources. In order to create a fully decentralized oracle, it may be necessary for a third-party blockchain to manage the oracle.

Contract-Specific Oracles

Contract-specific oracles are designed to manage a single smart contract and can be helpful in situations such as completing a real-world contract with blockchain funds. However, setting them up can be a little tedious, so they’re not ideal for recurring events.

Human Oracles

A human can act as an oracle, but they are usually more than just a person who reads the news and makes a change in the blockchain. Instead, they tend to be people with specialized knowledge in technological, financial or mathematical fields. Human oracles can verify information on a much more nuanced level, so they can be very helpful.

Computation Oracles

The oracles in question typically take data from the blockchain, do some processing off-chain, and then put the solution back on the blockchain. This can save money on gas fees, as the processing is done off-chain.

Solving the Oracle Problem

So-called “the oracle problem” is a big issue when talking about blockchain oracles. It happens when an oracle is attacked and as a result, the smart contract it was depending on also gets damaged. This is a typical case with centralized oracles which are under control of just one organization and are the only source of information for a smart contract.

Although smart contracts were designed to reduce the reliance on third parties, oracles that are needed to enact these contracts are often centralized. This creates a single point of failure, which can lead to privacy, security, and fairness issues.

The oracle problem is a challenge that has not been completely solved.

Use Cases of Blockchain Oracles

Oracles act as a bridge between blockchain-based projects and the outside world. They allow blockchains to interact with data that is not stored on the blockchain, which has exciting implications for how many industries that rely on blockchains can operate. As oracles become more prevalent, they have the potential to change the way many blockchain-related industries function.

DeFi

Oracles play a crucial role in any decentralized finance (DeFi) system as they are able to connect a blockchain with external data. The whole idea behind DeFi is to provide financial services without giving any one financial institution control. In order to do this, blockchains must be able to interact with information outside of their network which is where oracles come in. Oracles act as a bridge between the blockchain and real-world data, making it possible to use crypto for a variety of things like buying a home or managing retirement. So next time you use cryptocurrency to do something like receive payment for an item or get a loan for a car, remember that oracles played a part in making that possible.

DApps

Oracles are especially useful for decentralized applications (DApps). DApps are software that allow users who have little technological knowledge to interact with the blockchain. They provide daily services while still giving users ownership over their own data. You can find DApps for everything from insurance products to financial prediction markets to social media. Oracles have expanded the capabilities of DApps far beyond their original uses. With blockchain oracles, DApps can work in a much broader range of situations.

NFTs

There are some challenges that come with trying to link non-fungible tokens (NFTs) to actions that happen off of the blockchain. People who are into NFTs usually use the blockchain to register their assets and to trade them. But they can run into trouble when they want to use data that’s not on the blockchain. For example, let’s say you want to create a digital card for a football player who scores a certain number of goals. Do you have to do it manually? It would be much quicker if you could use oracles to create NFTs that are linked to events in the real world.

Benefits of Blockchain Oracles

There are many advantages to using blockchain oracles, including the following: 1. Blockchain oracles can help reduce fraud and increase transparency. 2. Blockchain oracles can help reduce the costs associated with traditional middlemen. 3. Blockchain oracles can help speed up transactions.

Adds Extra Functionality to the Blockchain

A blockchain oracle is a way to connect a blockchain to the outside world. This allows the blockchain to interact with external data, which allows it to be used for buying, selling, betting and investing.

The main reason so many people are using oracles is the additional functionality they provide. This makes it easy to use blockchains for a variety of tasks, from saving for retirement to creating DApps and NFTs. When blockchains can be used for everyday tasks, they become very flexible and powerful tools.

Flexible Parameters Provide Countless Applications

Oracles can be used for a variety of purposes, depending on what you need. They can be designed to perform repetitious tasks or just one-time actions. Additionally, they can either passively report information or take action within the blockchain.

The flexibility of oracles is a big reason for their popularity. You can use them in different situations and adapt them to what you need. Oracles are also less complex to set up than many other blockchain tools.

Saves Time and Effort

One of the benefits of using an oracle is that you do not have to manually create transactions on the blockchain. With an oracle in place, it can automatically execute smart contracts in response to an external event.

Oracles can automate simple tasks without the need for constant supervision. For example, you can set up an oracle to buy tokens when a cryptocurrency falls to a certain price, or to tell a blockchain to generate a new non-fungible token for every user in a game.

Risks of Blockchain Oracles

Oracles that are based on blockchain technology are often seen as a great solution to the problem of data security, but they’re not without potential drawbacks. When deciding whether or not to use a blockchain oracle, it’s important to be aware of the possible disadvantages.

Incorrect Data Can Lead to Big Errors

The security of a blockchain oracle depends on the data it consumes. If the oracle gets wrong data, it can make bad decisions.

If the oracle website is hacked and the wrong data is inputted, then the oracle could lose money. To avoid this, it is important to only use secure and reliable data, and to have a contingency plan in place.

Introduction of Third-Party Players

An oracle is a third-party service that connects users to a blockchain. This can cause problems with centralization, as it gives more power to a single entity.

For example, if Chainlink, the largest provider of blockchain oracles, gets purchased by a financial institution, what could happen? You could potentially end up with a big, bureaucratic organization in charge of your finances again. There’s also a chance that an untrustworthy oracle could act maliciously once they gain access to your crypto accounts or other assets. Users can mitigate these risks by selecting trusted oracles and working with decentralized oracle providers that are based on blockchains themselves. However, adding any other party to your connection with a blockchain invariably comes with some risks.

Examples of Blockchain Oracle Projects

Blockchain oracles are a new way to connect blockchain applications with off-chain data. They are already being used in many different projects.

Augur

Augur is a decentralized betting platform that uses Ethereum. It allows users to create markets for any concept and bet on them. If they are correct, they immediately receive funds. Augur is often used for things like sporting games and political outcomes. Oracles make sure that users receive their payouts in a timely manner.

Wrapped Bitcoin 

Wrapped Bitcoin is an ERC-20 token that is equal to one Bitcoin. Wrapped Bitcoin works with Chainlink to regularly check its assets using an oracle. An oracle is a way to check BitGo custody wallets for WBTC tokens and then update the chain if there are any deviations. This protects user funds and prevents devaluation.

API3

The API3 project is a DAO- governed project that strives to improve DApp creation by making it easier for users to build APIs for DApps. The trustless applications that are created through this project can interact with web-based APIs, which helps to develop a variety of other DeFi projects.

Band Protocol

Band Protocol is a platform for cross-chain data integration that has recently launched. The project focuses on using oracles to bring external data to a variety of blockchains. Its most interesting feature is the ability to cross-chain connections that use oracles to send information between different individual blockchains. Band Protocol has been found to be especially useful in creating smartphone-based DeFi platforms.

Agoric

Agoric is a startup that received a lot of interest from venture capitalists in late 2021. This blockchain is unique because it uses JavaScript, one of the most essential programming languages. Agoric allows users to create smart contracts based on JavaScript for a variety of flexible and accessible contracts. The recent integration of Chainlink oracles lets developers create reusable components that can develop applications quickly.

The Bottom Line

Oracles are a helpful tool that allows users to send external data to the blockchain and to execute smart contracts based on this data. By bridging the gap between blockchain networks and the outside world, oracles make it possible for users to build new DApps or to do personal investing.