A blockchain oracle is a third-party service that provides external information to smart contracts, acting as a bridge between the blockchain and the outside world.
Since blockchains and smart contracts cannot directly access off-chain data (i.e., data outside the blockchain network), many contract protocols require external information to function smoothly. This makes blockchain oracles particularly important, as they can establish a connection between off-chain and on-chain data, thereby expanding the applications of smart contracts. Without the support of oracles, smart contracts would be limited to relying solely on the data available within their networks.
It is important to note that blockchain oracles themselves are not data sources; rather, they serve as a layer for querying, verifying, and transmitting external data. Oracles can convey various forms of information, such as price data, transaction success messages, or temperature readings from sensors.
When calling upon external data, operations must be performed through smart contracts and will consume network resources. Some oracles not only deliver information to smart contracts but can also relay information back to external data sources.
Oracles come in various types, and their operation primarily depends on their design purposes. Below, we will introduce some common examples of blockchain oracles.
Examples of Blockchain Oracles
Imagine Alice and Bob betting on who will win the U.S. presidential election. Alice believes the Republican candidate will prevail, while Bob supports the Democratic candidate. They agree on the terms of the bet and lock their funds in a smart contract, which will release the funds to the winner based on the election results.
Since the smart contract cannot interact with external data, it must rely on an oracle to provide the necessary information. In this example, the oracle needs to retrieve the outcome of the presidential election. After the election concludes, the oracle confirms the results by querying a trusted API and relays this information to the smart contract. Subsequently, the smart contract will disburse the funds to either Alice or Bob based on the election outcome.
Without the oracle's intervention, the settlement of the bet would not occur in a way that is beyond the participants' control.
Types of Blockchain Oracles
Blockchain oracles can be classified based on various characteristics:
Source-Based Classification: Is the data sourced from software or hardware?
Direction of Information Transmission: Does the data come from external sources or internal systems?
Trust Level Classification: Is the oracle centralized or decentralized?
An oracle may belong to multiple categories simultaneously. For example, an oracle that retrieves information from a company’s website is a centralized inbound software oracle.
Software Oracles
Software oracles interact with online information sources to transmit data to the blockchain. This information can originate from online databases, servers, or websites, essentially any data source available on the internet.
Through internet connectivity, software oracles can provide information to smart contracts and transmit data in real time. As such, they are the most common type of blockchain oracle.
Typical information provided by software oracles includes foreign exchange rates, digital asset prices, or real-time flight information.
Hardware Oracles
Some smart contracts require interaction with the real world, and hardware oracles are designed specifically for this purpose. They gather information from the physical environment and provide this data to smart contracts. This information is typically transmitted through electronic sensors, barcode scanners, and other data-reading devices.
Fundamentally, hardware oracles convert real-world events into digital information that can be understood by smart contracts.
For example, a sensor can monitor whether a truck transporting goods has arrived at a loading dock. If the truck does arrive, the sensor sends this information to the smart contract, which can then make decisions based on this data.
Inbound and Outbound Oracles
Inbound oracles are designed to relay information from external data sources to smart contracts, whereas outbound oracles are responsible for transmitting information from smart contracts to the external world.
For instance, a temperature sensor sending data to a smart contract is an example of an inbound oracle. An example of an outbound oracle could be a smart lock. If funds are deposited into a specific smart contract address, the contract can use an outbound oracle to communicate this information to the smart lock, thereby unlocking it.
Centralized and Decentralized Oracles
Centralized oracles are controlled by a single entity and serve as the sole source of information for smart contracts. However, relying on a single information source can be risky, as the effectiveness of the smart contract is entirely dependent on the entity controlling the oracle. If this entity is compromised, the operation of the smart contract will be directly affected. The main issue with centralized oracles is the existence of a single point of failure, which can diminish the security of the smart contract and make it susceptible to attacks.
In contrast, decentralized oracles share some objectives with public blockchains, such as minimizing counterparty risk. Decentralized oracles do not rely on a single information source, thereby enhancing the reliability of the data obtained by smart contracts. Smart contracts can verify the validity and accuracy of data by querying multiple oracles, which is why decentralized oracles are sometimes referred to as consensus oracles.
Some blockchain projects also offer decentralized oracle services to other blockchains. Decentralized oracles are particularly useful in prediction markets, where they can validate the accuracy of a given outcome through social consensus.
Although decentralized oracles aim to achieve trustlessness, it is important to note that, like trustless blockchain networks, decentralized oracles do not completely eliminate trust but rather distribute it among multiple participants.
Contract-Specific Oracles
Contract-specific oracles are designed for individual smart contracts. This means that if multiple smart contracts need to be deployed, a corresponding number of dedicated oracles must be developed for each contract.
The development process for these oracles is time-consuming and costly to maintain. If a company wishes to extract data from multiple sources, contract-specific oracles may prove impractical. However, on the other hand, since these oracles can be designed from the ground up, they can serve specific use cases, providing developers with significant flexibility to meet particular needs.
Human Oracles
In certain specialized fields, knowledgeable individuals can also act as oracles. These individuals are capable of researching and verifying the authenticity of data from various information sources and converting it into a format suitable for smart contracts. Since human oracles can utilize cryptographic methods to verify their identities, the likelihood of fraudsters impersonating them and providing false data is relatively low.
The Oracle Problem
Given that smart contracts execute decisions based on data provided by oracles, oracles are critical to the health of the blockchain ecosystem. The primary challenge in designing oracles is that if they are attacked or compromised, the smart contracts relying on their data will also be affected. This issue is commonly referred to as the "oracle problem."
Since oracles are not part of the main blockchain consensus, they do not benefit from the security mechanisms provided by public blockchains. The trust conflict between third-party oracles and the trustless execution of smart contracts remains to be resolved.
Additionally, man-in-the-middle attacks pose a potential threat, as malicious actors may gain access to the data flow between oracles and smart contracts, allowing them to alter or forge this data.
Conclusion
To enhance the global adoption of blockchain technology, it is crucial to establish a reliable mechanism that facilitates communication between smart contracts and the external world. Without blockchain oracles, smart contracts would be limited to relying solely on information within their networks, severely restricting their functionality.
In the future, decentralized oracles may introduce multiple safeguards to eliminate many systemic risks within the blockchain ecosystem. Blockchain oracles remain a key component of the development of the blockchain ecosystem and must be implemented in a secure, reliable, and trustless manner.
Risk Warning
While the cryptocurrency market offers significant growth potential and innovation opportunities, it also carries a high level of market risk and price volatility. The value of crypto assets can fluctuate dramatically in a short period, potentially leading to substantial financial losses for investors. Additionally, the cryptocurrency market faces multiple risk factors, including technical risks, legal and regulatory uncertainties, cybersecurity threats, and market manipulation. We strongly advise users to conduct thorough research and due diligence before making any investment decisions and to consult professional financial advisors. All investment decisions are made at the user’s own risk. Thank you for your trust and support of Venkate!
Building The Future of Crypto Exchange
Where Meet a Confluence of Inspiration and Innovation
Venkate Exchange is an innovative cryptocurrency trading platform, drawing its name and inspiration from Venkateswara—a deity symbolizing wealth and prosperity in Indian mythology.
