What is a Blockchain Oracle, and How Does it Work?

• Blockchain Council
• June 07, 2022

‘Curiosity is the wick in the candle of learning’- inflicts a famous saying. Surprisingly, if it wasn’t for curiosity, we wouldn’t have discovered fire, unwrapped the potential of technology, and come up with the idea of something as unique as a cryptocurrency. All these remarkable inventions showed how powerful the human brain could be when fueled by curiosity to find something new.

When Bitcoin came, it garnered a lot of attention from the world. For the longest time, tech experts based their research on understanding the working pedagogy behind virtual currencies. However, as research operations gave successful insights, blockchain technology came into the much-needed limelight. Blockchain Technology, the strong pillar on which cryptocurrencies constructed their multi-billion-dollar industry, is a complete resource that promises to change how we trade, interact, or exchange finances. Often tagged as a Decentralized Digital Ledger, blockchain eliminates the need for third-party validation while ensuring best-in-class security standards, transparency, and immutability for users. The various participants involved in the channel are called network nodes, and they are the real heroes who manage the entire work.

As we started discovering the merits of blockchain technology, its loopholes began popping up as well. While trading data within a particular blockchain system is easy, exchanging it across multiple blockchains is a complex situation. This is where Blockchain Oracles come into play. Oracles work as a bridge for connecting blockchain ecosystems to external data inputs and outputs. They not only expand the working capacities of an individual blockchain network but also ensure the accuracy of data statistics available for users to use. The importance of oracles is quite evident, so the best blockchain certification offer in-depth knowledge to participants to leverage enhanced exposure within the field.

Here, we will help you understand the meaning of Blockchain Oracles, their working mechanisms, along with their pros and cons. So, let’s start:

What are Blockchain Oracles?

Oracles offer access to a path for the decentralized Web3 ecosystem where decentralization and digitalization are the core underlying features. They are a dedicated entity that links a blockchain platform to existing external data sources to facilitate the execution of smart contracts based on real-world information. Recognized as Decentralized Oracle Networks or DONs, oracles help Web3.0 clusters seamlessly access data junctions, legacy channels, and advanced computations without any hassle. They aid developers in building hybrid smart contracts in which there exists a combination of on-chain code and off-chain infrastructure for supporting innovative DApp projects.

Where on-chain data exists within the blockchain network, off-chain data resonates outside of the ecosystem. Firms and entities using blockchain technology join hands with renowned oracle networks like Chainlink to expand their capacities. Oracles play a significant role in widening the scope for the operability of smart contracts. Conversely, a lack of blockchain oracle would limit the use of smart contracts.

Interestingly, oracles are not just the links between blockchains and the external world; rather, they are an infrastructural layer that increases the efficiency of the core network. The oracles query, verify, and authenticate external data resources before wiring them to the requesting parties. The information moved by them comes in multiple forms: price data, data about the successful execution of a trade, or the temperature recorded by a sensor. Some robust oracle solutions can easily forward data to smart contracts while reverting it to external sources. You can learn blockchain technology concepts by choosing one of the courses offered by the Blockchain Council website.

The Oracle Problem

As smart contracts take decisions based on the data provided by oracle networks, the latter becomes an unprecedented unit of the core process. The main issue involved in building oracles is the risk of compromise. If the oracle is compromised, the smart contract depending upon it will also be compromised. This crisis is known as The Oracle Problem. It involves two segments:

• It is hard for individual blockchains to access external data sources independently.
• Employing centralized oracles governed by a single entity jeopardizes the potential of smart contracts, thus inducing security risks.

Oracles are not an element of the primary blockchain consensus, and so they do not constitute the security systems that public blockchains offer. Furthermore, the trust complexity between third-party oracles and the trustless execution of smart contracts remains unresolved. Finally, unforeseen intrusions can also pose a threat to the system, as in this, a hacker gets access to the data and changes it when moving between the oracles and the smart contracts. However, decentralized oracles work to solve these issues to ensure a healthy blockchain environment.

How do Oracles Work?

All oracle networks perform three important functions, including:

• Collection of data from a reliable external source
• Sending the information on-chain using a signed message
• Making the data source accessible for end users by storing it safely in the form of a smart contract.

Once the data is stored in a smart contract, other automated agreements can easily access it through message calls that refer to the ‘retrieve’ feature. The data can also be used directly by Ethereum nodes or network participants by accessing the storage section of the Oracle ecosystem.

Ways to Set up an Oracle

There are three main ways in which users can set up oracle solutions. This includes:

Immediate-read

The setup includes oracles providing data needed to make quick decisions such as ‘is this number greater than 10?’ The users who seek such information generally do so on a ‘just-in-time’ basis, inferring that the lookup is carried upon only when the query is presented. Examples include dial codes, airport identification, etc.

Publish-subscribe

This includes oracles that offer services for data that is bound to change, administered by an on-chain smart contract, or checked upon for updates by an off-chain protocol. Price feeds, user traffic data, economical or statistical data, etc., are examples of this setup.

Request-response 

The setup helps when the data space is quite ample for a smart contract and users are likely to use only a small part of the lot at a given time. It offers a combination of on-chain smart contracts and off-chain infrastructure. The oracles here monitor requests, retrieve, and return data quickly. The steps involved here are:

• Receive a request from a DApp.
• Take the query and fragment it.
• Verify that permission is there for payment and data access.
• Seek reliable data from an external source. Encrypt it if needed.
• Sign the transactions.
• Share the transaction on the network.
• Schedule additional transactions like notifications, etc.

Types of Oracles 

Software and Hardware Oracles

Software oracles collect data from online sources and wire it to the blockchain network. Online information comes from multiple sources like website portals, servers, etc. They are beneficial in providing information about supply chains to smart contracts in real-time. Its other vital areas are price charts, traffic information, etc.

If smart contracts need to flow information from barcode scanners and e-sensors, they need hardware oracles. These oracles are best suited for food supply chain management.

Outbound and Inbound Oracles 

Inbound oracles employ outside resources to provide data to smart contracts, whereas outbound oracles send data built by the smart contract to the real world. An example of an outbound oracle will include a smart contract that gives an update whenever someone adds money to his/her virtual account. For an inbound oracle, one can consider a sensor sending updates to the smart contract as a good application.

Decentralized and Centralized Oracles 

As the name suggests, centralized oracles and decentralized oracles differ based on authority and control. Where a particular entity controls centralized oracles, decentralized oracles have no such controlling power over them. The governing body in centralized oracles is the only source of information, whereas there are multiple sources of data in decentralized oracles. As a result, centralized oracles are less effective. The data moved using decentralized oracles can be easily validated and trusted.

Contract-Specific Oracles 

They work with single, smart contracts. Contract-specific oracles are less famous as they do not meet the requirements of the burgeoning blockchain industry. The efforts involved in their creation are pretty high compared to their usability, which is limited to a particular use case only.

Human Oracles 

Humans can also work as oracles if they possess the necessary expertise in the field. These oracles are involved in research operations and testing of authenticity of data right before it is fed to the smart contracts. In addition, the use of cryptography helps to ensure that the data is accessed by the right person.

Key Use-Cases of Blockchain Oracles 

Decentralized Finance 

Decentralized Finance, or DeFi, has become one of the hottest trends in the past few years span. The industry is growing in heaps and bounds and requires the best tools and resources to keep pace with its popularity. Oracles play a significant role in supporting the DeFi cluster as they help the users to access financial data related to assets and markets easily. For instance, money markets dealing with virtual assets employ price oracles to ascertain the borrowing capacity of investors. These oracles help to check if the position of investors is undercollateralized and pertains to liquidation. In addition, automated Market Makers use price oracles to concentrate liquidity at the prevailing market price to help enhance efficiency.

NFTs and Blockchain Gaming

With the help of oracles, smart contracts find their place in non-financial areas, such as NFTs and blockchain games. NFTs are highly dynamic and prone to changes with fluctuations in external events. Further, compute oracles help create verifiable randomness that assigns randomized characteristics to NFTs. These oracles also play a role in choosing random winners in games or NFT drops. E-games use verifiable randomness to enhance engagement and unpredictability in their ecosystems.

Business entities

Cross-chain oracles provide entities with a reliable blockchain-supported middleware solution. They help firms to integrate their backend channels with any blockchain easily. Oracles aid enterprises in creating support for smart contracts for their users without spending resources on developing a link with individual blockchains.

Insurance

Insurance firms use input oracles for smart contract execution on their decentralized clusters. These oracles validate the happening of insurable events during the processing of claims, offering access to physical sensors, APIs on the web, and legal data. Output oracles facilitate claim payouts across other blockchain networks or traditional payment channels.

Environment Accountability 

Hybrid contracts promote environmental sustainability by leveraging improved incentivizing for users involved in green initiatives. Oracles provide smart contracts with seamless access to environmental data using sensor readings, satellite imagery, and advanced technologies. The smart contracts then offer rewards to individuals and firms supporting the idea of sustainable consumption. They are also extending support to new carbon credits to reduce the climate’s negative impact.

Conclusion

Creating a secure infrastructure facilitating communication between smart contracts and external resources is crucial for the global expansion of blockchain technology. Without oracles, smart contracts will not be able to achieve their full potential as they would only be dependent on on-chain data for work. Various portals offer blockchain courses focused on oracle deployment within a decentralized ecosystem.

With decentralized oracles, blockchain networks can reduce various system risks and operational limitations. Furthermore, the expansion of blockchain oracles can help to provide users with a trustless, secure, and safe interface to grow and develop within the decentralized economic cluster.