On their own, Smart contracts and their Blockchains are unable to access data from outside their network. A Smart contract frequently requires access to information from the outside world relevant to the contractual agreement to know what to do.
Blockchain oracles provide a credible solution to this limitation on the smart contract. They act as conduits that help Smart Contracts receive and verify external or off-chain information needed to trigger the execution of certain logic on the Blockchain.
To provide a clearer insight into what this technology brings to the Blockchain ecosystem, I will delve deeper into what Blockchain oracles are and how they help execute various applications and programs on the Blockchain.
What are Blockchain Oracles
Blockchain Oracles, also known as Blockchain middleware, are mechanisms the Decentralized Web3 ecosystem uses to access off-chain data sources, thereby bridging the gap between the Blockchain (on-chain) and external third-party clients and services.
These Decentralized oracle networks (DONs) create a hybrid smart contract design that merges on-chain code and off-chain infrastructure to bolster advanced decentralized applications (dApps). These decentralized applications are enhanced to interoperate with the Blockchain system and react to real-world events simultaneously.
How do Blockchain Oracles Work
Simply put, Oracles collect data using a variety of tools. The tools could be APIs, SDKs, IoT sensors, or other sources. On collating the data, the Oracle application sends the on-chain smart contract transactions containing the necessary information. The smart contracts retrieve these data from the Oracle technology and store it in its repository for easy accessibility.
Data from Stock prices can be sourced from oracles like internet APIs, while analysts can determine climate/weather conditions from physical oracles like IoT sensors. There are other types of oracles from which the Blockchain sources off-chain information.
Types of Blockchain Oracles
Blockchain Oracles offer their services through distinctive designs and types. Here's a look at the various types:
Software oracles (Inbound oracles)
Software oracles are this technology's most commonly used form because of their versatility and ubiquity. These software oracles use APIs, databases, web crawlers, and more to obtain real-world data.
Hardware oracles (Inbound oracles)
These are oracles that physically connect to computer peripherals to obtain data. As a result of its tangible nature, this oracle type is the hardest to compromise, especially compared to the software oracles. Hardware oracles receive information from IoT sensors and Radio Frequency Identification (RFID).
Outbound oracles
Outbound oracles transmit data from the Blockchain to an external party or a third-party database. This action helps to espouse interoperability.
An example is the traditional Smart Contract.
Cross-chain oracles
Cross-chain oracles connect data and value between blockchains, thereby supporting interoperability.
Chainlink is a prominent example of Cross-chain oracles. This oracle variant has been playing a vital role in the growth of DeFi by enabling a data-rich environment that improves Smart contracts’ ability to function based on current market data.
This no.1 Oracle network brand has recently introduced Meta Oracle Capabilities for DeFi, which help the on-chain liquidity pool and provide users with pricing efficiency guarantees.
Compute-enabled oracles
This oracle helps to solve complex and highly sophisticated computations that would be expensive to carry out on-chain. Compute-enabled oracles also help verify the data before recording it on the Blockchain. An example is using zero-knowledge proofs to generate data privacy.
Use Cases of Blockchain Oracles
Blockchain oracles serve different benefits from finance, digital identity, and supply chain.
Finance
Due to crypto volatility, the Blockchain needs a conduit that constantly updates the technology on the current off-chain trends. Through the services of the Blockchain Oracle, smart contracts can get the prices of Ethereum and other cryptocurrencies to execute in line with current market trends, giving users a DeFi advantage.
Environment
This technology interacts with real-world data to obtain information about the environment needed to effectuate an action on the Blockchain. For instance, they help collect weather data to execute decentralized farmer insurance contracts registered on the Blockchain.
Digital Identity
This technology helps to validate a user's already provided identification materials like certificates and personal documents.
Supply chain
Oracle technology plays a vital role in logistics operations. The oracle smart contract uses software and hardware devices to track the state of delivery goods in transit.
Blockchain Oracle Problem
Blockchains are isolated networks designed to produce a definite result if the user or anyone else follows the same operational procedure (Determinism). Smart contracts inherently operate on data already stored inside their ledger and cannot independently extract or push data to any external system.
Oracles have become critical because most Smart contract use cases, such as DeFi, require knowledge of real-world data and off-chain events to realize up to 90% of their use cases efficiently. Combining oracles and Smart contracts benefits many industries, including asset prices in finance, weather information in insurance, randomness in gaming, IoT sensors in the supply chain, ID verification in government, and much more.
Final thoughts
Similar to how the internet transformed data and information exchange, Oracles are redefining the dynamics of value exchange in the blockchain and Web3 landscapes. This technology has not only increased the potential of the Blockchain beyond just finance, but it is also now applicable in our daily lives and other conventional activities.
I have no doubt Blockchain oracles will remain one of the valuable building blocks to be implemented in a safe, trustworthy and credible manner for the blockchain ecosystem to expand even more.
What are your thoughts? Do you think Blockchain oracles are essential facets of the Blockchain landscape?
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