What is an Oracle in Blockchain?

A blockchain oracle is a data-feed service that links smart contracts on the blockchain with the outside world. Blockchain oracles give decentralized Web3 ecosystems access to existing data sources. Blockchain had some limitations in communicating with the data sources outside the blockchain network prior to the development of blockchain oracles. Blockchain oracles are developed primarily for smart contracts to communicate and exchange resources with the outside world. Data sources from the internet and other external data sources outside the internet combined into information that is fed to the blockchain via the blockchain oracle and vice versa. Blockchain oracles were developed to facilitate the integration of real-world data with blockchain activities.

Smart Contract and Oracle

Smart contracts are self-executing code that runs on a blockchain in an automated and decentralized manner. The blockchain oracle resolves the communication issue of data outside the blockchain and smart contracts on the blockchain.

Oracles are data feeds that bring data from off-chain data sources and place it on the blockchain for use by smart contracts. Data (resources) outside the blockchain are referred to as "Off-chain data," whereas data existing data on the blockchain is referred to as "On-chain data." The oracle is developed to overcome the communication barrier and improve efficient communication from on-chain to off-chain and vice versa.

Blockchain oracles bridge the information gap between the blockchain and the outside world, resulting in "hybrid smart contracts."

Types of Blockchain Oracles

Blockchain oracles come in various forms and sizes because of the wide range of off-chain resources. Blockchain oracles are unique, but they can have variations. They are usually divided into types based on how they function.

1. Software Oracle

Software oracles are blockchain oracles that connect and share on-chain data to the Internet. These software oracles use databases, web scrapers, Application Programming Interfaces (APIs), and other methods to share data and communicate from on-chain (blockchain) to off-chain (Internet) and vice versa. Software oracles can be used to move off-chain internet data to on-chain (blockchain) and vice versa in a very fast, secure, and efficient way.

2. Hardware Oracle

Hardware oracles are blockchain oracles that help with resource transfers from off-chain to on-chain. In contrast to software oracles, hardware oracles deal with hardware components like storage devices, hardware electrical sensors, Internet-Of-Things (IoT), and other hardware devices. Software oracles deal with digital sources like websites, servers, and APIs.

3. Inbound and Outbound Oracle

Oracles as a data-feed service have a two-way communication link between off-chain data sources (outside world) and the blockchain for sending and receiving data. The inbound oracle receives data from the off-chain (outside world) to the blockchain, off-chain data like databases, APIs, hardware sensors, Internet-Of-Thing(IoT), etc. The outbound oracle sends data from the on-chain (blockchain) to off-chain (outside world), on-chain data like real-time cryptocurrency statistics like total supply, circulating supply, market capitalization, etc.

Centralized cryptocurrency exchanges leverage blockchain oracles for some trading functions. A trade (buy or sell order) can be placed If an asset reaches a specific price for an inbound oracle. Outbound oracles are then used to alert the outside world of an event that occurred on-chain.

4. Cross-chain Oracle

Cross-chain oracles are blockchain oracles that can read and write data across multiple blockchains. Cross-chain oracles address the issue of blockchain interoperability and are used to transfer data and cryptocurrency assets between blockchains. Cross-chain blockchain oracles are used when data on one blockchain is used to prompt action on another blockchain(s), or when assets are bridged across chains so they can be used outside of the native blockchain.

5. Centralized and Decentralized Oracle

A centralized oracle is a blockchain oracle that a single person or organization manages to regulate the resources that are sent and received both off-chain and on-chain. It is also centralized if the oracle only receives data from one source. Blockchain oracles must be partially centralized in order to function optimally.

A decentralized oracle is a blockchain oracle that isn’t controlled by a single entity or a third party to regulate the resources sent and received on-chain and off-chain. Decentralized blockchain oracles have their limitations, before creating smart contracts, decentralized blockchain oracles require consensus from multiple network participants. It is primarily governed by third-party blockchains.

What Applications use Blockchain Oracle?

1. Centralized Cryptocurrency Exchanges

Centralized cryptocurrency exchanges make use of blockchain oracles to share off-chain and on-chain resources. Cryptocurrency price on-chain can be used to trigger off-chain APIs to make certain trading actions via a blockchain oracle. A buy, sell or limit order can be placed when an asset reaches a specific price via an inbound oracle. Outbound oracles can alert the outside world of an event that occurred on-chain. Stablecoins used blockchain oracles to keep the price of a stable cryptocurrency pegged to a currency.

2. Decentralized Applications

Blockchain oracles are necessary for the majority of Defi (decentralized finance) decentralized applications to access financial data about cryptocurrency and markets. Price oracles are used by decentralized lending applications like the Goldfinch Protocol to assess the borrowing capacity of users.

3. Cryptocurrency Data Websites and Price Indicator Apps

Cryptocurrency data websites make use of outbound blockchain oracles to receive real-time data on cryptocurrency prices, market capitalization, total supply, circulating supply, number of addresses holding a cryptocurrency asset, contract addresses, etc.

Examples of websites that make use of outbound blockchain oracles are, Coinmarketcap, Coingecko, CryptoCompare, etc. Price indicator applications (Watchlist apps) makes also make use of outbound blockchain oracles via an API to get updates and enable a real-time trigger alert set by a user when a cryptocurrency reaches a particular price. This is very helpful in cryptocurrency analysis and trading.

Well-known Blockchain Oracle Projects

1. ChainLink

Chainlink is a decentralized blockchain oracle that provides tamper-resistant inputs, outputs, and computations to support advanced smart contracts on any blockchain.

Chainlink Oracle provides a reliable and tamper-proof network that connects highly accurate and available data/APIs to any smart contract via decentralization, trusted nodes, premium data, and cryptographic proofs. Chainlink allows users to build on a flexible framework that can retrieve data from any API, connect to existing systems, and integrate with any current or future blockchain. On Chainlink users can also automate contracts using a decentralized network of Chainlink automation nodes, reducing the risk of manual interventions and centralized servers.

2. SupraOracles

The adoption of blockchain technology is widespread, as many businesses have chosen to operate decentralized in order to increase transparency and trust. As more businesses and projects embrace decentralization, the need for off-chain data via oracles becomes critical for providing useful features and widespread adoption.

Almost every digital project, from DeFi to the metaverse, will necessitate access to external data sources. SupraOracles was created to improve oracles in preparation for a more decentralized future. SupraOracle core mission is to build the highest-performing blockchain infrastructure to power the world’s value exchange. Some of the features of SupraOracle are decentralization, scalability, ultrafast, security, quick finality, and interoperability.

3. Band Protocol

Blockchains excel at immutable storage and deterministic verifiable computations. They cannot, however, access trusted real-world information available outside their networks. Band Protocol improves smart contract functionality by providing access to trustworthy data without the need for a central authority or points of failure. In a nutshell, Band Protocol is a cross-chain data oracle platform that aggregates and connects real-world data and APIs to smart contracts. BandChain is intended to work with all smart contract platforms and blockchain development frameworks.

Summary

Blockchain oracles are used to connect on-chain (blockchain) data to off-chain (outside world) and enable efficient communication via a smart contract. Oracles are helpful in decentralized applications that rely on on-chain and off-chain data. Software oracles are used in connecting on-chain (blockchain) data to off-chain (Internet data) to share blockchain data and Internet data, while Hardware oracles share and exchange on-chain (blockchain) data with off-chain hardware data like storage devices, hardware electrical sensors, Internet-Of-Things (IoT), and other hardware devices. Cross-chain oracles are blockchain oracles that can read and write data across multiple blockchains. Cross-chain oracles help blockchain communicate and share data thereby removing the limitation of interoperability. Blockchain oracles are used in centralized exchanges, decentralized finance applications, cryptocurrency watchlist applications, etc.