Managing on-chain and off-chain data on blockchains is one of the most challenging tasks. Oracles are used to convey information between the real world and activities on the blockchain. Oracles can make everyday life a lot easier for users of blockchain technology.
In this guide, we’ll learn how oracles operate and how they can benefit blockchain users in the long run.
Introduction to Blockchain Oracles
Oracles are used by blockchains to import outside data on the chain. The imported data can trigger the blockchain to complete transactions automatically.
Oracles are like third-party plugins, which connect the blockchain and also serve the purpose of automating the blockchain. Different types of oracles can be directed to extract a specific type of data from the real world and input it into the blockchain.
The data collected by oracles includes deed transfers, weather info, and crypto prices. Based on the communicated data, oracles can direct the connected blockchain to execute smart contracts.
There are various types of oracles present in the market, and they can input and output data from the connected blockchain. Moreover, oracles are capable of working on software as well as hardware.
Depending on the required tasks, centralized and decentralized oracles can be used. All of these features make oracles very flexible and easy to use for blockchain users.
Working Mechanism of Blockchain Oracles
Since oracles are made and operated by third parties, all of them have their working mechanism. However, the basic concept behind all the oracles is always the same. They are just like APIs but for blockchains. Oracles aren’t a part of the blockchain or the data they deliver but rather work as a separate layer with the blockchain.
Whenever any additional information is needed by a blockchain, it can use the connected oracle to input external data.
Upon request by the blockchain, oracles collect and authenticate data. After this step, the data is then communicated to the blockchain. Once the data is on the blockchain, it can be used in several ways by the closed system.
In the case of smart contracts, blockchains are instructed to act upon certain types of data. Based on the correct data, a blockchain can easily execute a smart contract. Oracles can also be used the other way around – to send data from the blockchain to the real world. The data collected by oracles can be used by blockchains in a variety of ways.
Importance of Blockchain Oracles
Oracles can be used by blockchains in a variety of ways. You can think of a blockchain oracle as a bridge between a blockchain and the real world. If there are no oracles connected to a blockchain, the blockchain acts as a closed ecosystem and won’t react to any external event.
To understand the importance of blockchain oracles, users must understand how they work and what their applications are.
Blockchain Oracle Applications
Blockchain oracles can be used with cryptocurrency as well as smart contracts. For example, if a person is selling his car, the title information and total price of the car can be listed on the blockchain.
Once the buyer makes the payment, an oracle can be used to confirm the transaction and transfer the title as soon as the transaction is confirmed. This is how oracles can connect cryptocurrencies and smart contracts with blockchains.
Oracles are useful in simple, smart contracts as well. In betting, simple, smart contracts can be made. After the match end, an oracle can be used to analyze the game data and release the money to the winner.
Oracles are also used in investments and risk management. Farmers can use oracles to create derivatives for their crops. If their crops get destroyed by bad weather, the derivatives can pay the farmer.
Moreover, if there’s less rain than expected in a season, oracles can automatically collect and communicate the data to the blockchain, and the insurance fund can be released to the concerned farmers.
Finally, oracles can also be used in crypto investments. For example, investors can program their oracles to react to certain price triggers in the crypto market. Oracles can then automatically buy and sell cryptocurrencies for investors based on certain price triggers. Experienced investors use oracles to maintain and constantly update their diverse investment portfolios.
So, we can conclude that oracles can perform a variety of tasks easily. Since oracles can connect both the real world and blockchains, they can significantly improve the functionality of blockchains. Blockchain oracles can be implemented into the daily lives of billions of people around the world to make their daily tasks easy.
Types of Blockchain Oracles
Since they are used in many different tasks, blockchain oracles can be of many different types as well. Oracle types are made depending on their function. One oracle can also fall into more than one category. To find the right oracle for your needs, you must learn about the different types of oracles.
These oracles work both as inbound and outbound oracles. These oracles collect and process the data off-chain and then input the processed data on the blockchain.
This method of data transfer can help compute the data outside their blockchain and save a lot of gas fees in the long run.
Inbound and outbound oracles can be differentiated based on the data flow direction. As the name suggests, inbound oracles operate by taking real-world data and inputting it into the blockchain.
Inbound oracles are one of the most useful types of oracles, as they can be used to collect information about real-world events and implement them on the blockchain to affect how it operates.
Outbound oracles are practically the opposite of inbound oracles. Rather than collecting data from the outside world, they output data from the blockchain onto another system.
By setting up the outbound oracle in a certain way, users can direct the connected outside system to perform certain tasks based on the data provided by the connected oracle.
These oracles are the most used type of oracle in connection with blockchains. These oracles are seamlessly integrated with software-based information systems in the real world and input the data collected from them onto the connected blockchain.
Software oracles can be connected to weather sources, servers, and databases. They collect data that is authentic and publicly available. Currently, software oracles are used to collect flight information and forex market updates.
Since hardware oracles include certain devices in their setup, they are rather complicated to start with. Various hardware devices like RFID, barcode scanners, motion sensor, and thermometers are used to make hardware oracles.
Once a hardware oracle is set up, it can continuously collect the required type of data through the sensors connected to it and relay it to the connected blockchain. The data provided to the blockchain by its hardware oracle can be utilized to create smart contracts.
Although hardware oracles are difficult to create and operate, they can automate the processing of real-world events – like the arrival of a car at your business facility – and the onboarding of that data onto the connected blockchain in the form of a smart contract.
Humans can also be used as oracles. While you might be thinking that a human oracle can only be used to manually input the data onto the blockchain, they are much more than this.
Human oracles consist of people who are experts in their fields. These experts can be used by blockchains to analyze and verify data before it is input into the blockchain.
Contract- Specific Oracles
Although lots of oracles are designed to keep acquiring and inputting data onto the connected blockchain, contract-specific oracles only deal with a single contract. These oracles can be used to verify the completion of real-world contracts, which can then trigger the release of blockchain funds. However, since contract-specific oracles are very difficult to make and execute, they are usually not the ideal type of oracles to use for recurring tasks.
Whenever oracles are centralized, the centralization can either come from the source of data or directly from the authority controlling the oracle. If an oracle is completely controlled by a single company or person, and the information/ data sources are also set by the same entity, it can be termed a centralized oracle. Oracles collecting data from a single source are also termed centralized oracles.
While a certain degree of centralization is inevitable in every type of oracle, too much centralization can negatively impact the functionality and efficiency of oracles. That’s because if the oracle relies on a single source of information, any amount of misinformation from that source can impact the whole system.
By decentralizing oracles, the risks associated with centralized oracles can be mitigated. For example, decentralized oracles can collect data from multiple data sources, and the chances of malicious and unverified data getting inputted into the blockchain can be minimized.
However, just like with any other sector, implementing decentralization in the case of oracles is also a challenging task.
To achieve consensus and decentralization, decentralized oracles need multiple data sources to continuously provide them with the required data. Decentralized oracles can benefit from multiple data sources and choose the most accurate data while muting inaccurate data sources.
To create truly decentralized oracles, third-party blockchains have to be used, which are also completely decentralized and are not controlled by a single entity.
Issues Associated with Blockchain Oracles
The oracle problem is one of the most concerning things for every blockchain oracle in general and centralized blockchain oracles in particular.
The oracle problem occurs when an oracle is compromised because of the unreliable information it receives from its information source. Because of the compromised data received by the oracle, the resulting smart contract also gets compromised. This problem usually happens with centralized blockchain oracles since they are owned and operated by a single entity and rely on a single source of information to create smart contracts on the connected blockchain.
The key reason behind the creation of smart contracts is to minimize counterparty risks and minimize reliance on third parties in these contracts. Oracles create smart contracts and introduce a trustless system through which two parties can easily enter a smart contract without requiring a third party.
However, centralized oracles rely on a single source of information and thus have a single point of failure as well. This is why whenever the data received by an oracle gets compromised, the resulting smart contracts are also compromised. This presents the users with certain privacy and data-related risks.
Although the introduction of various types of oracles has helped in mitigating privacy and data-related risks, the oracle problem still needs to be fully solved.
Use Cases of Blockchain Oracles
Since blockchain oracles are used to bridge the gap between real-world data and blockchains, they can be used in several different ways. Blockchain oracles have the potential to change the blockchain industry for the better.
Let’s take a look at some of the best-used cases of blockchain oracles.
Since NFTs or Non-Fungible Tokens are used as the digital representatives of real-world assets, there are lots of problems in connecting NFTs with off-chain processes. NFTs can be used to list assets on the blockchain and to make trading them a lot easier and transparent.
However, using off-chain data when creating NFTs can be difficult. For example, if a user wants to create digital NFT cards for players scoring a set number of goals in a football match, they might have to do it manually without oracles.
However, with the implementation of blockchain oracles in the NFT industry, everything can be automated and made a lot simpler and easier.
Decentralized finance applications have to use oracles to input accurate data onto the connected blockchains. The key concept behind DeFi is providing everyone with equal financial opportunities and services without letting a central authority control everything related to finance.
To ensure true decentralization, blockchains must collect data from outside sources. With the help of blockchain oracles, users can easily input their data onto the blockchain and get their loans approved without the intervention of a third party.
With the help of accurate information analyzed and verified by blockchain oracles, smart contracts can be formed and enforced on the blockchain. This is how blockchain oracles can help you in making cryptocurrency transactions, getting loans, or saving for your retirement.
DApps are one of the most effective use cases of blockchain oracles. Decentralized applications provide users with limited technical knowledge to access the blockchain through a friendly user interface. Moreover, these applications provide users full control over their data and ensure perfect data privacy.
Decentralized applications or DApps can be developed for every industry, including finance, banking, or even social media. Now, blockchain oracles can be used by these applications to enhance their functionality. The operational range of DApps, and their functionality can become a lot better with the help of blockchain oracles.
Benefits of Blockchain Oracles
No matter how you utilize them, blockchain oracles can always provide you with lots of benefits. Let’s take a look at some of the most prominent benefits of blockchain oracles which are making them widely popular these days.
Enhanced Blockchain Functionality
The basic and key benefit of blockchain oracles is that they help connect blockchains with the real world. With the help of connected oracles, blockchains can receive the useful letter they need to complete complex tasks. Oracles make blockchains more functional by ending their reliance on one source of data and connecting them to multiple data streams for better reliability and decentralization.
The implementation of oracles with blockchains makes blockchains eligible for everyday use, like trading, investing, and betting.
The additional functionality they provide to the connected blockchains is the main reason why many people and companies have started to use blockchain oracles these days.
With the help of these oracles, blockchains can be used for NFTs, DApps, and the DeFi sector as well. Once blockchain technology gets started to be used in daily tasks, it will become very flexible and powerful.
Oracles can fully automate the creation of smart contracts on the connected blockchains, and eliminate the need for manual inputs by humans. Instead of binding yourself to input all the data by yourself, you can automate everything by using an oracle for data collection and inputs.
Once you’ve set up the oracle, it can continue working normally, and execute smart contacts based on externally collected data.
While oracles can’t be used to perform complex tasks, they can certainly automate easy and repetitive tasks. This saves you a lot of time and effort.
Since they help bridge the gap between blockchains and real-world systems, oracles can prove to be a very helpful tool in blockchain automation. Users can send external data to blockchains through oracles, and this can help them automate the creation of smart contracts. Oracles can be used in NFTs, DApps, and DeFi.