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Blockchain technology has significantly innovated a number of sectors, including finance, healthcare, and other fields. The inability of blockchain technology to connect with the outside world, however, is one of its fundamental drawbacks. As a result, blockchain oracles have been created. In this blog, we will explain what blockchain oracles are, how they work, and their use cases.
What are Blockchain Oracles?
The services that link blockchains to external (off-chain) third-party clients and services are known as blockchain oracles, also referred to as blockchain middleware.
By offering channels for communication between blockchains and third-party services and vice versa, oracles serve as a bridge between blockchains and external data sources.
Decentralized oracle networks (DONs), which investigate, verify, and authenticate resources from external services for usage on blockchains, are used by hybrid smart contracts (smart contracts that use oracles) on smart contract blockchains.
Since they are merely data structures, blockchains are, by design, devoid of data. However, in order to operate, they frequently require data from external sources, which must be reliable and accurate.
To assure a high level of data accuracy and eliminate single points of failure, decentralized Oracle Networks (DONs) compute, modify, and analyze data from several sources.
As various blockchains are served by oracles like Chainlink and Band Protocol, they may also be used as interoperability solutions.
How Do Blockchain Oracles Work?
Blockchain oracles work by retrieving data from external sources and transmitting that data to the blockchain. The data is then processed and used by smart contracts to execute their functions. There are two types of oracles: software oracles and hardware oracles. Software oracles retrieve data from online sources, while hardware oracles retrieve data from physical sensors.
Types of Blockchain Oracles
Today, several different kinds of oracles are employed. Let’s examine each one in turn:
- Inbound Oracles: The work of delivering information into the blockchain from outside sources is carried out by inbound oracles. These inbound oracles would access external data for the blockchain by using hardware oracles, software oracles, or a combination of the two. An example of an incoming oracle is one that scrapes data from Web 2.0 domains.
- Outbound Oracles: Data from a blockchain is distributed to a third party by use of outbound oracles. The third party could be an external database or another blockchain for interoperability reasons. The oracle would be a blockchain-based smart contract. Oracles are used by software like Web3Py and Web3Js to query the blockchain and send information to Web 2.0 services.
- Software Oracles: Software oracles are oracles connected to the Internet. These software oracles use databases, web scrapers, APIs, and more to fetch data. They are the most widely used form of oracle because of their versatility. An example of a software oracle would be an oracle feeding the Ethereum blockchain with data from YouTube using YouTube’s API.
- Hardware Oracles: To retrieve data for utilization, hardware oracles connect to hardware and computer peripherals. Compared to software oracles, they are reliable because it is more difficult to compromise them. IoT sensors and RFID tags are used by hardware oracles to get data from their sources.
- Consensus-based oracles: Consensus-based oracles assist in ensuring that data put onto the blockchain is correct and reliable by using numerous oracles and a consensus process to extract factual data for smart contracts.
- Cross-Chain Oracles: Blockchain interoperability is made possible via cross-chain oracles, which connect data from different blockchains. These could be agnostic (non-blockchain) protocols, like the Band Protocol, which permits the transmission of data and currency between blockchains. Data from Ethereum to Cardano can be connected using a cross-chain oracle like Chainlink.
Oracles on Popular Blockchains
- Ethereum: Chainlink, Band Protocol, iExec, UMA, Orai
- Solana: Chainlink, DIA, Pyth, Switchboard, Gravity
- Cardano: Charlie3, API3, Orcfax, PIGY Oracle, Chainlink
- Terra: Chainlink,
- Tron: Wink, Bridge Oracle
- Cosmos: Band Protocol
The Oracle Problem
Blockchains are used to increase transparency and trust among parties who interact. Since real-world data cannot be accessed by blockchains, as we just mentioned, any information an oracle gives must be reliable and accurate.
The oracle problem relates to the degree of decentralization, safety, trustworthiness, and reliability of oracle networks.
This issue can be resolved by using a variety of data sources, avoiding a single point of failure, and making sure the data sources are accurate and trustworthy.
Use Cases of Blockchain Oracles
- Decentralized Finance (DeFi)
The DeFi industry is one of the most important use cases for blockchain oracles. DeFi apps depend on outside data sources, including price feeds, to carry out their tasks. The accuracy of DeFi transactions is guaranteed by the secure and dependable access that blockchain oracles offer to various data sources.
- Supply Chain Management
Supply chain management can make use of blockchain oracles to trace the movement of commodities and verify their validity. Blockchain oracles can enable real-time tracking and verification of items by linking to external data sources like GPS sensors and product databases, lowering the risk of fraud and guaranteeing that things are delivered to their designated location.
Insurance companies can use blockchain oracles to automate claims processing and reduce the risk of fraudulent claims. By connecting to external data sources, such as weather reports and IoT sensors, blockchain oracles can provide accurate and timely data that can be used to trigger smart contracts for insurance payouts.
Blockchain oracles can also be used in gaming to provide fair play and transparent outcomes. By connecting to external data sources, such as random number generators, blockchain oracles can provide unbiased and verifiable outcomes for games and lotteries.
A key connection between blockchain networks and the outside world is made possible by blockchain oracles. Blockchain oracles open up a wide range of use cases for blockchain technology, from DeFi to supply chain management and beyond, by allowing smart contracts to access real-world data.
The use of blockchain oracles is anticipated to spread as the acceptance of blockchain technology rises, opening the door for a more connected and effective society.