Blockchain systems face a challenge when it comes to connecting to outside data. Normally, blockchains function as closed systems, unable to access off-chain data and make it available for use in smart contracts on-chain. Oracles play a critical role in addressing this issue by allowing smart contracts to access off-chain data and execute based on real-world inputs and outputs.
What is a decentralized oracle?
Oracles are not tools for predicting cryptocurrency prices, as the name might suggest. Rather, they serve as bridges that connect smart contracts to off-chain data. This means that any type of real-world data, such as sports results, crypto prices, property transfers, weather data, or geolocation data, can be sourced, verified by oracles, and transmitted to smart contracts running on the blockchain.
Oracles are not only useful for getting off-chain data into smart contracts but also for pushing information from the blockchain to off-chain data providers. With oracles, blockchain users can utilize blockchains in a variety of ways in their daily lives.
For instance, let's say Jude and Jane want to bet on the outcome of a sports match. Jude bets $10 on Team A, and Jane bets $10 on Team B, with the $20 payout to be held in escrow by a smart contract. The outcome of the game and the payout to the winner can only be facilitated with the help of oracles that provide the match outcome in a secure and reliable manner.
How do they work?
Blockchain oracles are essential in many blockchain applications because they act as a link between the blockchain and real-world data. They act as middleware systems and devise various mechanisms to solve the blockchain oracle problem.
Most oracles operate under a similar principle. They work like APIs that retrieve data from external sources when requested. After successfully querying the data, it is verified, validated, and broadcasted onto the blockchain. With this data, smart contracts can execute automatically based on predetermined conditions without requiring trust.
What are the benefits?
Blockchain oracles serve as a bridge between blockchains and off-chain data, and they provide several benefits, including:
Expanded functionality: Oracles enable smart contracts to access external data, which can broaden the range of capabilities and use cases for the contract.
Enhanced trust and security: Oracles can authenticate and verify data before sending it to a smart contract, thereby improving the overall trust and security of the blockchain.
Increased flexibility: By enabling smart contracts to access external data, oracles can make the blockchain more versatile and adaptable to different industries and use cases.
Real-world integration: Oracles can bridge the gap between the digital world of the blockchain and the physical world by enabling smart contracts to interact with real-world data and events.
Automation: Oracles can automate the data collection process and feed it to the smart contract, streamlining data collection and making the process more efficient.