What Are Blockchain Oracles?

Let’s say you want to build an app focused on stock price predictions. If you want to go one step further and make it decentralized, a smart contract would be the backbone of such a complex app. These contracts consist of data and functions that can be executed on the chain when activated by a transaction.
You probably already know that blockchains can only store transaction records; they don’t have access to information such as stock price movements. But to make your dApp functional, you must supply information that doesn’t reside on a blockchain to your smart contract.
And for that, you will need an oracle.

Reading Time: 3 minutes


Illustration: Lenka T.

Blockchain Oracles Explained

Blockchains don’t see outside their borders; anything happening outside their binary world is foreign to their source code. In other words, blockchains can’t access weather information, stock prices, or personal information. Rightfully so, this is not their purpose.

Besides, we don’t need them to be multifunctional. At least not in this way.

However, we do need access to external information to ensure our on-chain operations function correctly. After all, you can’t build a stock prediction dApp if you don’t have access to stock prices.

Here’s where oracles come into play.

Oracles are third-party service providers that supply smart contracts with information that doesn’t reside on the chain. As stated earlier, that could be anything from user data, prices, temperature, shipment and flight delays, etc. They are also critical for cross-chain communication, allowing data and assets to circulate between chains.

Essentially, oracles serve as bridges that enable cross-chain interoperability and on-chain development. Without them, NFTs, dApps, and the entire DeFi ecosystem as we know it today wouldn’t even exist.

Types of Blockchain Oracles

Off-chain resources come in many shapes and sizes, and so do blockchain oracles. They’re segregated into types based on their functionality. Here are the two most common ones:

  • Software oracles: These are the most common oracle types, and they draw data from digital sources such as databases, AIPs, and other publicly available data archives. They rely solely on software to retrieve necessary information.
  • Hardware oracles: Hardware oracles interact with the real world. They collect information from sensors, thermometers, scanners, and similar physical devices.

We could also separate them into two categories:

  • Centralized oracles: This oracle type acts as a centralized entity. They can be operated by a group of people or even a single person. Some oracles are also called centralized because they retrieve information from a single data supplier.
  • Decentralized oracles: These entities collect data from various sources, increasing the validity and quality of the information supplied to smart contracts.  

Benefits of Blockchain Oracles

As blockchain oracles serve as intermediaries between external data and blockchains, they offer numerous benefits. For example, they’re essential for incorporating crypto in real life, enabling users to shop with crypto.

Furthermore, oracles are an essential link in dApp development. A pathway to off-chain data can bring more versatility to the ecosystem and enable the development of dApps with different use cases. The data provided by blockchain oracles influences the execution of smart contracts, allowing DeFi insurance apps, for example, to function properly. Not only that, but we wouldn’t be able to lend, borrow, or stack yield without oracles.

As you can see, their role in dApp and DeFi development is transformative. And by providing a secure transfer of factual data, they increase blockchain reliability and play a pivotal role in seamless contract executions.

Disadvantages of Blockchain Oracles

Not everything is all fine and dandy here; oracles have disadvantages, too.

Think of blockchain oracles as AI chatbots. If you use biased or faulty data to train it, your chatbot will be biased, unreliable, and its outputs won’t make any sense. The same goes for oracles. Kind of?

If the data the oracles are collecting is biased or faulty, it will create problems. Blockchains rely on this data, and if an oracle can’t verify its integrity or is compromised by someone with malicious intent, it will eventually lead to exploitation or smart contract issues. That’s why centralized oracles, for example, are not always a good idea.

Still, oracles are necessary. Although issues can occur, it all boils down to how they operate and what security measures these entities employ to ensure the maximum data quality. So, if you’re building something and need an oracle to access vital data, do your research, and pick a good one.

Jelena is a content writer dedicated to learning about all things crypto. Her hobbies are playing chess, drawing, baking, and going on long walks. During winter, she usually spends her leisure time reading books.