What are oracles in blockchain and cryptocurrency?
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Blockchain oracles aim to bring interoperability to blockchain networks by enabling them to interact with external data sources.
Oracles are a new technology enabling smart contracts to execute and interpret real world data, relaying this back to the blockchain.
Read on to learn everything that is needed to know about the role of oracles in the blockchain ecosystem.
What are oracles in blockchain?
A blockchain oracle acts as a bridge between blockchain systems and off-chain data sources, allowing smart contracts to interact with external data sources or connect to an off-chain system.
Oracles in blockchain interface with external APIs and data feeds, allowing them to feed real-world data into a smart contract or push data from a blockchain.
Why are oracles needed?
Blockchains oracles allow smart contracts to securely access real-world data from off-chain sources.
Without decentralised oracles, blockchain networks are severely limited in their capacity to interact with external sources, limiting their potential applications. This is largely due to the strong security properties of blockchain networks.
Decentralised oracles enable smart contracts to integrate off-chain systems, including external data feeds, payment rails, events, and more.
When traders consider real-world use cases of smart contracts they realise most require off-chain data to trigger execution, and integration to existing payment channels to settle a contract.
Example of a blockchain oracle
An example of a blockchain oracle network is Chainlink. Chainlink is a decentralised protocol that enables smart contracts to interact securely with off-chain data sources via the use of decentralised oracles.
Chainlink is composed of several decentralised oracle networks actively operating on the network, data providers running their nodes, and node operators. Therefore, blockchain networks can use Chainlink to aggregate multiple off-chain data points to form a single trusted data point, which can be used to trigger smart contracts on a blockchain network.
Moreover, Chainlink acts as an abstraction layer for data providers to sell their existing APIs to blockchain networks. The native cryptocurrency of the Chainlink network is LINK.
What are the different types of blockchain oracles?
Given the varying complexities of off-chain resources, blockchain oracles come in several forms to handle numerous scenarios. We will discuss some of the oracle types in this section.
Input oracles
Input oracles allow smart contracts to interact with real-world data sources. These are the most widely recognised type of oracles today. An example of input oracle includes DeFi smart contracts pulling off-chain financial markets data.
Output oracles
Output oracles are the opposite of input oracles, in that they enable smart contracts to send instructions to off-chain systems that trigger them to execute certain actions.
Cross-chain oracles
Cross-chain oracles allow interoperability between different blockchains by moving data and assets, as well as bridging assets cross-chain so they can be used outside their host protocols.
Compute-enabled oracles
Compute-enabled oracles use secure-off chain computation functions to provide decentralised services that are impractical to run on-chain due to the rigid structures of blockchain networks.
An example is Chainlink Keepers, which acts as a decentralised off-chain computation layer where key smart contract functionalities can be automated and advanced utility introduced to DApps using custom triggers.
- Further reading: Crypto glossary - Learn all the crypto market terms you need to know
Blockchain oracle use cases
Blockchain oracles are deployed to build several advanced decentralised applications across many industries. Here are some of the current applications of blockchain oracles.
Decentralised Finance (DeFi): Price Feeds
Blockchain oracles are most widely recognised for price feeds used in DeFi transactions, in areas such as lending, derivatives, and stablecoins.
For instance, the Maker protocol depends on price feeds to determine the value of the underlying collateral backing the asset. Moreover, oracles are useful in providing data about the market price of collateralised assets in Maker Vaults, allowing the platform to trigger liquidations under the right market conditions.
Oracles can also be used to monitor fraud in real-time by functioning as “independent” auditors. Several stablecoins, including USDP, TUSD, and even wrapped coin WBTC, are using blockchain oracles to authenticate the collateralization of their tokenized assets. This way users are to some extent protected from the unpredictable nature of crypto markets.
According to numerous experts, DeFi in its current form can’t significantly scale without critical off-chain financial data provided by blockchain oracles.
Insurance
Blockchain oracles can power parametric insurance contracts by pulling weather data from Accuweather or Google Cloud to trigger the settlement of crop insurance claims.
For example, Arbol, an insuretech platform, uses blockchain oracles to report when a certain level of rainfall has happened, triggering the execution of the smart contract and in turn settling the claimant’s payment. This is achieved without the need for a lengthy claims process.
Prediction Markets
Oracles are vital for prediction markets. Prediction protocols allow users to trade the outcome of various events. Oracles play the role of verifying the results.
NFTs and Gaming
Blockchain oracles support dynamic NFTs that can change in appearance, distribution, or value based on external events like time or weather. Moreover, compute oracles are used to generate verifiable randomness that projects can utilise to assign randomised traits to NFTs. This feature has been implemented by several NFT projects, like EtherCards, where NFTs are randomly dispersed to ensure fair community participation.
The Oracle Problem
The blockchain oracle problem illustrates a key weakness of smart contracts, which is they can’t interact with external data and systems outside their native blockchain network.
Being purposely isolated from external resources or off-chain data is not without benefits as blockchains gain valuable properties like distributed consensus mechanisms and tamper-proof transactions.
Solving the oracle problem is important since many smart contract use cases require interacting with real-world data and events off-chain. Oracles are essential to act as a bridge between blockchain networks and external resources.
Blockchain oracles allow the evolution of “hybrid smart contracts” while allowing crypto networks to retain their structural properties.
List of blockchain oracles projects
Chainlink
Chainlink (LINK) is the leading blockchain oracle project in the market. Chainlink is a multi-chain oracle network that provides accurate and verifiable real-world data for smart contracts. Chainlink’s decentralised oracle network connects smart contracts to price feeds, asset feeds, weather data, sports feeds, shipping data, and more. Chainlink’s current total market capitalisation is $3,236,953,413 as of June 23rd 2022.
UMA
UMA (UMA) is a decentralised oracle that allows users to deploy and trade synthetic assets on Ethereum by leveraging an “optimistic oracle” to interact with off-chain data. An optimistic oracle serves data to smart contracts through a flexible feature that offers a dispute resolution mechanism for inaccurate or manipulated data. UMA’s current total market capitalisation is $167,179,772 as of June 23rd 2022.
WINkLink
WINkLink (WIN) is the first TRON ecosystem decentralised oracle that aims to fully integrate off-chain events with the blockchain network. WINkLink will provide external data such as price feeds, events, and access to payment rails as well as offer reliable, unpredictable, and unverifiable random numbers. WIN’s current total market capitalisation is $107,561,612 as of June 23rd 2022.
API3
API3 (API3) is a DAO that creates an API for DApps known as dAPI. dAPIs are decentralised API services designed by combining multiple operators and running Oracle needs free of counterparties. The current total market capitalisation of API3 is $61,175,219 as of June 23rd 2022.
Band Protocol
Band Protocol (BAND) is a cross-chain decentralised oracle that aggregates and connects off-chain data and APIs to smart contracts. Band oracles can be used across multiple blockchain networks and allow for flexible, efficient, and scalable data queries secured through cryptographic proofs. The current total market capitalisation of BAND is $50,316,645 as of June 23rd 2022.
What are the advantages of decentralised blockchain oracles?
- Reliable Data: Decentralised oracle networks work by aggregating multiple data points to arrive at one single point of truth. Combined with off-chain computation, smart contracts can acquire accurate data that has been sought from multiple off-chain resources and computed to arrive at the most accurate data.
- Trust: Decentralised oracles rely on data from multiple independent sources and therefore achieve trustlessness.
What are the disadvantages of decentralised blockchain oracles?
- Third-party collusion: Since decentralised oracles rely on multiple external sources to pull information on-chain they are susceptible to third parties colluding to manipulate data or perpetrate fraud.
- Long duration: The time taken to aggregate data from multiple sources and arrive at a consensus on the outcome is longer when compared to centralised blockchain oracles. If all the network oracles need to reach a quick consensus then the speed of individual oracles is the determining factor.
- Cost - Decentralised oracles are considered ideal for protocols with multiple functions running at different times but require a high investment in infrastructure and maintenance costs.
FAQ
Why are oracles important in blockchain?
Oracles are essential to the distributed ledger ecosystem because they expand the possibilities for smart contracts. Without decentralised oracles, smart contracts would only have access to data within their crypto networks, limiting their potential applications.
Decentralised oracles act as an abstraction layer that queries verifies, and authenticates off-chain sources before relaying that data on-chain. The data being transmitted by oracles includes price feeds, temperature readings, weather information, and digital payments, among others.
To pull data from external sources the smart contract needs to be invoked, and blockchain resources expended. Some decentralised oracles can pull and push data from and to a smart contract.
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