Several data cannot be automatically entered into the blockchain directly. This could be weather data, stock prices, sports event results, and other variables from the outside world. Blockchain oracles have been developed to integrate external data into the blockchain. In this article we have described the main features and principles of blockchain oracles.
What is a blockchain oracle?
A blockchain oracle serves as a mediator that facilitates the integration of external data with blockchain networks. While blockchain technology itself ensures the security, immutability, and transparency of data recorded within the blockchain, it faces limitations in directly accessing data sources outside its network. This is where blockchain oracles come into play.
How do blockchain oracles work?
In decentralized applications, smart contracts most often play a crucial role. However, some actions require access to external data, such as information from platform aggregators and exchanges. For example, calculating the exact exchange ratio between two different coins.
Smart contracts are unable to retrieve information outside of the blockchain. And that’s where the blockchain oracle helps. This intermediary requests, verifies, and authenticates all data from external sources, and then passes it on to the smart contract for processing.
Let’s take a closer look at the most common types:
- Software and hardware oracles
The first difference is in the way the data is obtained. A software blockchain oracle extracts information from various online sources and transfers it to the blockchain. The second type collects data using physical devices such as barcode scanners or chips.
- Centralized and decentralized oracles
The main difference here is the degree of control. A centralized oracle under the control of a single individual provides information to a smart contract in a single person. A decentralized oracle, on the other hand, brings together multiple participants who collaboratively provide data.
- Contract-oriented oracles
This type of oracle specializes in serving a specific smart contract. The information obtained through such an oracle is restricted to use only within that contract.
- Cross-chain oracles
This type of oracle is used to transfer information between different blockchains. It serves as a bridge between blockchain systems, enabling data transfer and reconciliation between them.
Each type of blockchain oracle has its own unique characteristics and specific uses, making the technology even more flexible and adaptable to the diverse needs of decentralized applications.
Examples of blockchain Oracle applications
- Financial markets
Blockchain oracles can be used to transmit up-to-date data on stock prices, exchange rates, or bets. This enables the creation of decentralized financial instruments and contracts.
- Insurance
In insurance, blockchain oracles can be used to verify events such as natural disasters or accidents and automatically calculate payouts to policyholders.
- Weather conditions
Weather data through oracles can be used to create insurance products, and risk assessment of agricultural operations.
Leading projects developing blockchain oracles
- Chainlink
A leading project in the blockchain oracle market. It is distinguished by the fact that it doesn’t have its blockchain. To date, Chainlink oracles successfully function in Ethereum, Solana, and EVM-compatible blockchains. The project’s ecosystem has more than 1,300 applications and platforms, which confirms its influence and relevance.
- Band Protocol
Band Protocol, ranked second in Oracle services, presents a special perspective on the evolution of this technology. Unlike Chainlink, Band Protocol features its own BandChain blockchain managed by a network of validators. Band Protocol actively interoperates with applications on the Celo, Oasis, and Cronos networks.
- Reality. eth
The Reality. eth protocol, formerly known as RealityKeys, has attracted attention for its innovative approach and functionality. Its key idea is to create new data sources for smart contracts, instead of using existing ones.
To summarize
Blockchain oracles play a crucial role in expanding the horizons of blockchain applications by seamlessly integrating external real-world data. As blockchain technology continues to mature, the importance of oracles becomes increasingly evident, fostering a stronger connection between decentralized systems and the real world.
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