A blockchain oracle is a service that acts as a blockchain’s bridge to the outside world to obtain real-world information. It connects blockchains to off-chain data sources, including websites, databases, and sensors.

A blockchain oracle automatically converts data obtained from these external sources into a format that the blockchain network can understand.

Blockchain oracles connect smart contracts with real-time global and physical events, making them more relevant to a broader range of applications. For example, crop insurance policies executed by smart contracts can use a blockchain oracle to automatically trigger payouts when it detects and verifies extreme weather conditions and natural disasters.

Read More about a Blockchain Oracle

How Does a Blockchain Oracle Work?

Blockchain oracles serve as a bridge or an intermediary between the blockchain network and the outside world. Think about it as a translator automatically getting information from external data sources and translating them into a language that the blockchain can understand.

Blockchain networks cannot access outside data, so they need an intermediary. Aside from transmitting data, blockchain oracles also ensure the data is accurate and secure.

What Are the Applications of Blockchain Oracles?

Blockchain oracles have several use cases across various sectors, including the following:

  • Decentralized Finance (DeFi): Blockchain oracles are used to provide real-time price feeds for cryptocurrencies, commodities, and other assets, which are used by DeFi protocols to execute various financial transactions, such as lending and borrowing.
  • Gaming: Blockchain oracles provide real-time data on game outcomes, enabling smart contract execution that automatically rewards players based on their performance.
  • Insurance: Blockchain oracles provide real-time data on weather events, natural disasters, and other events that trigger insurance payouts.
  • Supply chain management (SCM): Blockchain oracles provide real-time tracking of products and goods for greater transparency and accountability in the supply chain. This process helps reduce the risk of fraud and counterfeiting.

What Are the Types of Blockchain Oracles?

Blockchain oracles can be classified into different types, depending on their functionality. To summarize, the types of blockchain oracles are:

Types of blockchain oracle
  • Software-based oracles
  • Hardware-based oracles
  • Inbound oracles
  • Outbound oracles
  • Decentralized oracles
  • Centralized oracles

These are explained and categorized below.

Source of Information

Blockchain oracles can be software- or hardware-based, depending on where they get information. Software-based oracles use application programming interfaces (APIs) to communicate with external data sources. APIs are services that allow two parties to interact with each other.

Hardware-based oracles use hardware to interact with external data sources. These devices are highly specialized and secure, making them more expensive than software-based oracles.

Flow of Information

Blockchain oracles can also be classified as inbound and outbound, depending on the direction of the information flow. The crop insurance smart contract we described above uses an inbound oracle that brings information from the outside and into the blockchain network.

Outbound oracles, on the other hand, work the other way around. They transmit data from the blockchain network to the outside world. Outbound oracles are primarily used to provide websites with updated information regarding the supply of cryptocurrency within a blockchain network.

Control of Data Sources

Another category of blockchain oracles depends on how the data sources are controlled. If a blockchain oracle relies on a single data source and is controlled by one entity, it can be classified as a “centralized oracle.”

In contrast, decentralized blockchain oracles rely on multiple independent data sources and oracle nodes. This type of blockchain oracle is less prone to a single point of failure than centralized oracles.

What Are Examples of Blockchain Oracles?

Some of the most popular blockchain oracles are:

  • Band Protocol: Band Protocol is a decentralized oracle platform that provides data services through APIs. It is used to provide blockchain networks with real-time weather data, financial information, and sports scores.
  • Chainlink: Chainlink is the largest blockchain oracle, providing secure data transmission and a decentralized oracle network useful in insurance, SCM, and DeFi.
  • Decentralized Information Asset (DIA): DIA is an open-source oracle platform designed explicitly for DeFi systems. It encourages participants to share pricing data for digital assets by giving incentives. Anyone can then access this data and verify its accuracy.
  • Universal Market Access (UMA): UMA is popular among blockchain developers since it provides smart contract templates that allow them to create financial smart contracts seamlessly.

Key Takeaways

  • A blockchain oracle connects blockchain networks to external data sources. It automatically converts data into a format that the blockchain network can understand.
  • Blockchain oracles increase the relevance of smart contracts to real-time events and data.
  • Blockchain oracles have various applications, including DeFi, gaming, insurance, and SCM.
  • Blockchain oracles can be software- or hardware-based, inbound or outbound, and centralized or decentralized.
  • Popular examples of blockchain oracles include Chainlink, Band Protocol, DIA, and UMA.
  • Blockchain oracles ensure data accuracy and security for reliable and efficient data transmission.