Numerous blockchain applications need for communications with off-chain and real-world external data. This information can reflect anything, including weather conditions or the results of actual sporting events.
But blockchains are unable to access outside data. They are purposefully built as closed systems to support dependable, secure, and tamper-proof transactions. A blockchain oracle can be useful in this situation. It is a program that links blockchain networks with external data.
Types of oracles
Oracles can be used in two different ways, to start. Smart contracts receive external data from inbound (or input) oracles. The reverse of inbound oracles, outbound oracles push events that occur on the blockchain to the outside world.
Oracles may be divided into two categories: hardware and software oracles. Data is transferred from the physical world using hardware oracles. They can be used, for instance, to read data from RFID or NFC tags in supply chain activities. Smart contracts get off-chain data from software oracles that is still digital. In other words, oracles may be used to get data from servers, websites, or online databases. Using the values of financial assets to place buy or send orders on cryptocurrency exchanges is one example of an application area.
The oracle issue
Oracles can also be divided into centralized and decentralized groups. A centralized oracle is one that is run by only one person or thing. The procedures may be carried out very quickly since this form of oracle just relies on one source. However, centralized oracles may not be accurate or accessible owing to server malfunctions.
The blockchain’s oracle problem is the term used to describe these problems that might occur when centralized oracles are used to connect external resources with on-chain networks.
Because of this, the oracles that we use to link the outside world with the blockchain must also be decentralized, just like we need a decentralized web3 for a dependable, impenetrable, and censorship-resistant internet. Otherwise, we run the danger of depending on skewed and erroneous data.
A distributed peer-to-peer network that employs a number of data sources from a decentralized oracle to reach consensus on external data before uploading it to the blockchain. As a result, they provide greater degrees of accuracy and security.
Projects utilizing decentralized blockchain oracles
Chainlink is the most widely used blockchain oracle solution. Link, the project’s native cryptocurrency, is now the top oracle coin according to Coingecko statistics, with a market valuation of $3.7 billion. Blockchain-based smart contracts may be connected by cryptocurrency firms using Chainlink technologies to pricing data, payment processors, healthcare providers, verified randomness, automation features, or external APIs.
UMA, which enables oracle integrations for incentive-aligned liquidity mining and DAO fundraising, and API3, which offers beacons as data feeds to increase transparency and airnodes middleware to connect web APIs to any blockchain application, are two other top blockchain oracle solutions by market cap.
Applications for blockchain oracles
Chainlink collaborates with a lot of industry pioneers. Partnerships are particularly prevalent for tying oracles together to create dynamic NFTs. For instance, the oracle service provided by Chainlink is used by the play-to-earn card-collecting game Aavegotchi to provide existing NFT avatars with uncommon traits. The same approach is used by Polychain Monsters, another blockchain game, to demonstrate the unpredictability of its NFT pack distributions.
Decentralized weather coverage is another area of use. Blockchain oracles are used by the data-driven climate risk ecosystem Arbol, for instance, to extract data from rainfall databases provided by the National Oceanic and Atmospheric Administration.
In order to appropriately distribute prizes to the winning users, the information markets platform Polymarket employs Uma’s oracles to put the answers to bets onto the blockchain.
Another typical use for oracles is the integration of off-chain pricing feeds into DeFi protocols. For instance, Trader Joe incorporates off-chain price information into their Avalanche financing platform. It becomes feasible to provide safe, scalable loans at true market values as a consequence.
