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Beyond the Chain: How Oracles Are Transforming Blockchain Development Process?

The decentralized and trustless nature of blockchain makes it difficult to access and incorporate external data. As the adoption of blockchain technology grows, the need to interact with external data will also increase.


Is there a way for blockchain networks to make use of outside data?


The answer would be Yes. Blockchain oracles can provide external data to a blockchain network.


Blockchain Oracles-What are they?


Blockchain oracles serve as a gateway between the blockchain and the outside world, enabling the implementation of smart contracts based on external data. They provide access to existing data sources, legacy systems, and more complex computations to the decentralized Web 3.0 ecosystem. Consequently, they allow developers to create hybrid smart contracts that combine on-chain code and off-chain infrastructure, thus facilitating the development of cutting-edge decentralized projects.


For example, a decentralized finance (DeFi) platform that allows users to lend and borrow cryptocurrencies will require real-time price data on various cryptocurrencies to determine the value of the collateral and the interest rates for borrowing. A blockchain oracle connected to cryptocurrency exchange will provide the data to the Defi Platform. The blockchain oracle would continuously monitor the crypto exchange for the latest prices of the cryptocurrencies supported by the DeFi platform. When the oracle detects a price change, it would immediately transmits this information to the DeFi platform's smart contracts, which would use it to calculate the collateral value and interest rates for borrowing. By using a blockchain oracle in this scenario, the DeFi platform can ensure that the price data used to calculate the collateral value and interest rates is accurate and up-to-date, which is crucial for ensuring the stability and security of the platform.


How do Blockchain Oracles work?


  • Data collection is the initial stage in the process. Oracles can retrieve data from APIs, IoT Devices and sensors, databases, and other blockchain networks.
  • After data collection, the oracle confirms its validity and precision. Data verification is fundamental to guarantee the trustworthiness of the data and its utilization in blockchain-based programs.
  • Once the data gets verified, it gets transmitted to the blockchain network through a smart contract. If the smart contract reads this information, the blockchain network processes the information.
  • Data Processing may involve executing smart contracts, updating the blockchain ledger, or initiating other automated actions.
  • Lastly, applications and users can access the data from the blockchain network. Oracles can open up novel opportunities, as they allow for the utilization of external data.

Types of Blockchain Oracles


Decentralized Oracles: Decentralised oracles present a promising solution to feed data to blockchains without creating a single point of failure. Through the implementation of consensus mechanisms, token incentives, and multiple node operators, these oracles can supply data in a manner that is not dependent on trust. Of the various decentralized oracles, Chainlink is the most notable.


Software Oracles:  Oracles can provide real-time information to smart contracts when connected to the internet. This data can include the value of digital assets, currency exchange rates, and any other data type. Furthermore, oracles can interface with external data providers, comprehend their discoveries and add them to the distributed ledger.


Hardware Oracles: Hardware Oracles acquire data from the real world and make it available to Smart Contracts. Through electronic sensors, barcode scanners, and other data-reading devices, physical values get transformed into computable values that Smart Contracts can utilize.


Inbound Oracles: The most beneficial type of oracle is an inbound oracle, as it enables the incorporation of real-world information onto the blockchain. They can be highly advantageous, as they facilitate the utilization of external data and real-world scenarios to affect the operation of the blockchain.


Outbound Oracle:  The blockchain data can be sent to a separate system rather than utilizing external data on the blockchain. Depending on the configuration of the oracle, the external system (for example, a banking network) can execute a task based on blockchain data.


Contract-Based Oracles: Contract-specific oracles are tailored to fulfil the needs of an individual smart contract and may be beneficial when managing a contract that involves blockchain funds. Nevertheless, the setup of these oracles can be effortful, making them less suitable for recurrent occasions.


Computation Oracles: Rather than simply relaying the outcome of a query, computation oracles can perform calculations on a collection of inputs and return a determined result that would otherwise be impossible to calculate on-chain. They are a means of utilizing oracles to compute off-chain data solutions and, in turn, reduce expenses associated with gas fees.


Consensus-Based Oracles: Consensus-based oracles employ a consensus algorithm and multiple oracles to provide accurate and reliable data to smart contracts. These oracles can be seen as a step towards decentralization, as they aggregate and evaluate different data sources to obtain a single outcome.


Cross-Chain Oracles: Cross-chain oracles enable interoperability between data and assets transacted across multiple blockchains, thereby triggering certain actions based on data from one chain onto another. Furthermore, these oracles permit the bridging of assets for use beyond the boundaries of their native chain.


The Oracle Problem: Its Effects on Blockchain Development


Addressing the Oracle Problem is important when leveraging smart contracts and oracle networks. Smart contracts that depend on oracles get negatively impacted if oracles are compromised, thus posing a security risk. This issue involves two distinct elements: the difficulty for individual blockchains to connect to external data sources and the risk of employing centralized oracles governed by a single entity. It is essential to adequately address this problem to use the full potential of the smart contracts development process.


The lack of an element of primary blockchain consensus, in addition to the unresolved trust complexity between third-party oracles and the trustless execution of smart contracts, renders oracles incapable of forming the security systems that public blockchains offer. Furthermore, unforeseen intrusions can also prove to be a challenge as a hacker may gain access to the data and alter it during the transition between the oracles and the smart contracts. Nevertheless, decentralized oracles can address these issues to maintain a secure blockchain environment.


End Note


Oracles are becoming an integral part of the advancement of the blockchain development process. They are highly beneficial due to their capacity to link blockchain networks to the external world. By incorporating off-chain data, these oracles can be immensely advantageous for numerous real-world industries in exploring the potential of smart contracts.