Blockchain Oracle: Types, Uses and How it Works

The term “blockchain oracles” might seem familiar if you’ve been keeping up with the development of the infrastructure supporting smart contracts and blockchains. The blockchain industry is developing in its data-rich setting. Any data from the external world can’t just “communicate” to a blockchain; it has to be entered by hand. However, this is labour-intensive and prone to bias or mistakes. Oracles allow blockchains to interact in real-time with not only other digital information but also with regular, everyday things like smart devices. 

What is Oracle?

An “oracle” dispatches data from the outside, like temperature readings or votes received by a political party to a blockchain. The smart contract present on the blockchain could leverage the data to decide whether to dispense money and the receiving party.

• An oracle essentially helps Ethereum smart contracts perform tasks sequentially in an automatic manner. Smart contracts execute the terms of the relationship after the conditions are met.
• They provide a way for the decentralized web3 ecosystem to access the existing data sources and advance computations.

Some of the Oracle database editions in order of priority are: 

• Enterprise Edition: This edition is the most robust and secure. It offers all features, superior performance, and security.
• Standard Edition: This edition provides base functionality to the users and does not require Enterprise Edition’s robust package.
• Express Edition (XE): It’s a lightweight, free, and limited Windows, and Linux Edition.
• Oracle Lite: This edition is specially designed for mobile devices.
• Personal Edition: This edition is comparable to Enterprise Edition, but it doesn’t provide the Oracle Real Application Clusters Feature.

Problem with Blockchain

Once any data is reported to a blockchain, that data becomes an integral and immutable part of the blockchain’s history that cannot be removed. Any incorrect execution of the smart contract based on that data will cause irreparable damage to your contract.

• Security: As the level of complexity in blockchain increases the security complications also elevate thus eradicating the possibility of infiltration. Here is an example of it, If anyone wants access to data sharing in an exclusive blockchain, they only need access to one node in it.
• Scalability: Long blockchain technology produces more challenges for organizations because it runs into trouble with scalability. If anyone wants to run this technology then you require massive storage and create a more secure system, and the node that confirms the transactions for that needs more power to process everything.
• Speed for Transaction: The use of blockchain transactions is faster if we transfer account to account. There is a certainty that the decentralized nature of the blockchain may jeopardize everyday transactions and it’s verified by the nodes before being accepted as a block.

How does Oracle Solve this Problem?

As the blockchain problem reaches consensus, one cannot provide external information related to transaction data since other nodes would know that the information is being derived from an “untrusted” source. Therefore, information should ideally come from a third-party source that is reliable for all nodes, which is the oracle.

• Oracles do not directly insert information into the blockchain usually but instead, they collect and store data from the real world. 
• When a smart contract is executed, the code calls for accurate information from the trusted oracle thus acting as a virtual bridge to digest external information into an intelligible format for blockchains.

What is Oracle’s Problem?

The defining quality of a blockchain like Ethereum is that it’s able to run smart contracts. But once they are programmed, the smart contract is controlled by the blockchain making the transaction immutable based on conditions for the smart contract.

• It also implies that the oracle, which is a data feed run by an entity. 
• Trusting any such data source could create problems. If the owner of the data feed posts inaccurate data to favor themselves, it will deliver problematic results. 
• Alternatively, anyone can hack the data feed to push and sway data completely in their favor.

What is a Blockchain Oracle?

Blockchain Oracles are similar to a third-party service provider. They link third-party applications and services to the blockchain and supply external data to smart contracts. Smart contracts and blockchains are isolated from the real world by purpose. To put it more technically, they are not intended to interact with off-chain information (not on the network).

• Oracles on the blockchain serve as a vital link between the blockchain and the off-chain and on-chain data they facilitate.
• The smart contracts’ utility is enhanced by the availability of off-chain information. It increases the potential uses for smart contracts. 
• Without the presence of blockchain oracles, smart contracts would be unable to interact with information from sources outside the network, limiting their usefulness. 
• A blockchain oracle is like a solution layer that checks, queries, and authenticates data sources outside the blockchain. As soon as it finishes processing, it sends the results along.

Furthermore, the information supplied by the blockchain oracle can be anything of value. A healthcare system, with the use of oracles, may, for instance, inquire about insurance information. On the other hand, oracles will be sought after by the food sector to relay data on the chain of production and distribution of food products.

How does Blockchain Oracle Work?

• Blockchain oracle establishes a connection between a blockchain and the real world. Oracles send data to smart contracts running on the blockchain, which the smart contracts then utilize to execute predetermined actions in response to the data.
• For the sake of a financial contract, for instance, an oracle may supply data on current prices in real time. When the price of an item reaches a predetermined threshold, the contract might automatically buy or sell that asset.
• For an oracle to function properly, it must first be able to retrieve data from various outside sources, and then it must format that data in a manner that is comprehensible by the smart contract. The term for this kind of activity is “data aggregation.” After the data have been aggregated, they are “events” before they are sent to the smart contract to be processed.

Oracles are a layer of infrastructure that is analogous to application programming interfaces (APIs), which are also employed to retrieve data from various outside sources. Oracles and application programming interfaces (APIs) do, however, diverge in significant ways.

Decentralized Oracles

The information provided to smart contracts by decentralized oracles is more trustworthy than that provided by centralized oracles since it is not based on a single source of truth. The goals of these oracles are identical to those of public blockchains. Even though they strive for a trustless system, they do not eradicate trust entirely but rather spread it among numerous people.

• They solve the problem of a single source of failure in centralized oracles. This means if one of the oracles fails to function as intended for any reason then the smart contract will be able to function as planned.
• It combines multiple independent oracle node operators and multiple reliable data sources to establish end-to-end decentralization.

Centralized Oracles

This is a special kind of oracle that can only be accessed by one party and serves as the sole data source for smart contracts. However, depending on a single data source is dangerous since it leaves the smart contract vulnerable to manipulation. 

• Centralized oracles have one main drawback they are vulnerable to a single point of failure. 
• It also makes smart contracts more susceptible to exploits and other forms of harm.

Types of Oracles

Since smart contracts on the blockchain are unable to access external data, they must rely on an oracle to provide them with the information they need to function. Now, let’s look into the various blockchain oracles available.

1. Software Oracles

These oracles communicate with external data providers and add their findings to the distributed ledger. They are able to assemble data from any online source, including servers and web pages. Internet-connected oracles can instantly provide the requested data to running smart contracts. Any kind of up-to-the-moment data, such as currency exchange rates or the cost of a digital asset, can be provided.

2. Hardware Oracles

Hardware oracles are built to glean data from the real world and make it accessible to smart contracts. These oracles convert physical occurrences into machine-readable values that smart contracts can use.  Electronic sensors, barcode scanners, and other reading devices could be used to obtain such data.

3. Inbound Oracles and Outbound Oracles

Outbound Oracles bring information from the outside world in for use by smart contracts. Exactly the opposite of an inbound oracle is an outbound one. These oracles broadcast data from smart contracts to the outside world.

4. Human Oracles

At times, experts in a given field might also serve as oracles. They have the ability to sift through information from a variety of sources, research it, and then verify its veracity before transferring it to smart contracts. Since human oracles can use cryptographic methods to confirm their identities, the likelihood of fraudulent information provision is reduced. Human oracles can not only relay deterministic data but also react to random questions, something that could be challenging for a machine to do.

5. Contract-specific Oracles

An oracle of this sort is intended for usage by a single smart contract, hence deploying multiple contracts requires the creation of multiple contract-specific oracles. Many people avoid using oracles because of the time and money they take to keep up.

6. Cross-chain Oracles

These can read and write information between different blockchains. Cross-chain oracles enable interoperability for moving both data and assets between blockchains.

7. Compute-enabled Oracles

Compute-enabled oracles use secure-off chain computation to provide decentralized services that are impractical to conduct on-chain due to technical, financial, or legal constraints. These are mostly used by Layer2 solutions like ZK Rollups to gather data off-chain. 

8. Consensus-based Oracles

These oracles use multiple oracles and a consensus algorithm to derive factual data for smart contracts. They help to ensure that the data passed to the blockchain is accurate and trustworthy.

Oracle Design Patterns

All oracles perform some key roles based on their capabilities including the ability:

• Derive data from any non-blockchain source.
• Send data on-chain leveraging signed messages.
• Store the data in a smart contract to make it accessible.

Once done, other automated agreements can easily access the stored data through message calls invoking the “retrieve” function.

The three design patterns to set up an oracle are:

1. Immediate-read: These oracles provide data required for quick decision-making, based on queries that work on a “just-in-time” basis, with information derived only when needed. Sample the dial codes or airport identification and oracles related to academic certificates.
2. Publish-subscribe: This oracle provides a broadcast data service that could change information and be polled by smart contract on-chain or watched by off-chain daemon for constant updates. These designs span weather data, volatile price feeds, social statistics, and routine traffic data.
3. Request-response: This pattern includes a large data space for storage in smart contracts. Users can access a small portion of the information at any point in time, making this pattern perfect for commencing a viable business strategy for veteran data providers. It could be implemented as a system of on-chain smart contracts and for monitoring requests.

Use Cases of Blockchain Oracle

Oracle bridges the gap between the off-chain world and the world of smart contracts. Here are some use cases of the blockchain oracle itself:

1. Insurance

Oracles are useful for deriving weather information to indicate flight delays. These details are useful for claims in insurance products. Tailored insurance plans could relate to coverage related to flight delays along with crop insurance. Oracles are the best sources to get information about weather status that could be leveraged to validate claim payments automatically.

2. DeFi

Oracles are important to the decentralized finance (DeFi) system since it is focused on providing financial services that do not permit a single financial institution to take control of the process. Blockchains interact with outside information and use crypto for transactions related to home purchases or devising retirement plans. Blockchain oracles work as a medium or a bridge that utilizes real-world information in smart contracts. Blockchain oracles are critical to receiving payments or gaining a vehicle loan, and other transactions. Financial data including market prices can be retrieved through oracles in DeFi smart contracts. The oracles can calculate the borrowing capacity and collateral levels of users. AAVE is a recent DeFi platform that leverages price feed oracles for deriving asset prices for use in smart contracts.

3. DApps

Oracles go hand in hand with decentralized applications (DApps) that allow users with no technical know-how to interact seamlessly with blockchain. They give users ownership over data and hence can be used anywhere in financial prediction markets for all kinds of social media channel activities. Oracles extend capabilities far beyond original purposes enabling smarter and broader situations.

4. NFTs

Oracles are instrumental in the development of a verifiable randomness function (VRF) to preserve the rarity of NFTs with random assignments. NFTs have faced challenges related to linking them to several off-chain actions. Enthusiasts use blockchain to register assets for trading purposes. However, they are finding it difficult to use off-chain data. Using oracles makes it quicker for creating NFTs that are connected to objects and memories in real-world events.

5. Cross-Chain Services

Blockchain oracles are instrumental in resolving interoperability issues between different blockchains. The cross-chain services built through oracles help users to transmit data between blockchains without the need for chain-specific integration.

6. Banking, Stablecoins, and CBDCs

Stablecoins are tokens pegged to assets like commodities or fiat currencies. They are often collateralized with off-chain reserves, but algorithmic versions also exist. Conversely, central bank digital currencies (CBDCs) are government-issued. Oracles are instrumental in keeping the stablecoin prices updated and keeping a check on collateralization in check.

Benefits of Blockchain Oracle

• Flexible Parameters: Oracle can repeat an action or just perform it once. The oracle can passively report, or it can take actions in the blockchain. 
• Extra functionality added to Blockchain: Oracles provide blockchain with the external data that is required to perform complex tasks. Oracle allows the blockchain to interact with external data instead of being limited to a single network. Thus, blockchain can be used for everyday tasks like buying, selling, and investing.
• Save time and effort: Oracles don’t require users to manually make transactions on the blockchain. Once the oracle is properly set up it can execute the smart contracts in reaction to the external trigger. Although oracles cannot manage complex situations, they can perform simple transactions without requiring constant oversight.

Risks of Blockchain Oracle

• Third-party players: Oracle is not built directly into the blockchain, instead it is a third-party process that requires a user to work with a provider who then connects them to the blockchain. Adding middlemen can cause problems with centralization. 
• Incorrect data: If oracle gets wrong information due to either malicious actions or innocent mistakes and it can end up making unfavourable decisions. To remain safe, it is important to use only secure, reliable data.

Conclusion

One of the most pressing challenges for the global rollout of blockchain development technology is the creation of a reliable mechanism to facilitate interaction between the outside world and smart contracts. If blockchain oracles weren’t available, smart contracts would be limited to using only data already available within their networks.
Safeguard measures can be built into the blockchain ecosystem with the help of decentralized oracles networks (DON), which might greatly reduce the system’s vulnerability. To ensure the continued growth and success of the blockchain ecosystem, it is crucial that oracles be deployed in a way that is both secure and trustworthy.