Blockchain oracles aim to bring interoperability to blockchain networks by enabling them to interact with external data sources. Oracles are a new technology enabling smart contracts to execute and interpret real world data, relaying this back to the blockchain. Read on to learn everything there is to know about the role of oracles in the blockchain ecosystem, the blockchain oracle problem, and a starter crypto oracles list.
What are Oracles in Blockchain?
A blockchain oracle acts as a bridge between blockchain systems and off-chain data sources, allowing smart contracts to interact with external data sources or connect to an off-chain system. Oracles in blockchain interface with external APIs and data feeds, allowing them to feed real-world data into a smart contract or push data from a blockchain.
Importance of Oracles in Blockchain
Blockchains oracles allow smart contracts to securely access real-world data from off-chain sources. Without decentralized oracles, blockchain networks are severely limited in their capacity to interact with external sources, limiting their potential applications. This is largely due to the strong security properties of blockchain networks.
Decentralized oracles enable smart contracts to integrate off-chain systems, including external data feeds, payment rails, events, and more. When traders consider real-world use cases of smart contracts, they realize most require off-chain data to trigger execution, and integration to existing payment channels to settle a contract.
Different Types of Blockchain Oracles
Given the varying complexities of off-chain resources, blockchain oracles come in several forms to handle numerous scenarios. We will discuss some of the oracle types in this section.
Input Oracles
Input oracles allow smart contracts to interact with real-world data sources. These are the most widely recognised type of oracles today. An example of input oracle includes DeFi smart contracts pulling off-chain financial markets data.
Output Oracles
Output oracles are the opposite of input oracles, in that they enable smart contracts to send instructions to off-chain systems that trigger them to execute certain actions.
Cross-chain Oracles
Cross-chain oracles allow interoperability between different blockchains by moving data and assets, as well as bridging assets cross-chain so they can be used outside their host protocols.
Compute-enabled Oracles
Compute-enabled oracles use secure-off chain computation functions to provide decentralized services that are impractical to run on-chain due to the rigid structures of blockchain networks.
An example is Chainlink Keepers, which acts as a decentralized off-chain computation layer where key smart contract functionalities can be automated and advanced utility introduced to DApps using custom triggers.
What is the Oracle Problem in Crypto?
The blockchain oracle problem illustrates a key weakness of smart contracts, which is they can’t interact with external data and systems outside their native blockchain network. Being purposely isolated from external resources or off-chain data is not without benefits as blockchains gain valuable properties like distributed consensus mechanisms and tamper-proof transactions.
Solving the oracle problem is important since many smart contract use cases require interacting with real-world data and events off-chain. Oracles are essential to act as a bridge between blockchain networks and external resources. Blockchain oracles allow the evolution of “hybrid smart contracts” while allowing crypto networks to retain their structural properties.
How many Blockchain Oracles Are There?
According to CoinGecko, there are 38 blockchain oracle projects in the global crypto market. With Chainlink being the most popular and largest blockchain oracle by market capitalisation.
Crypto Oracles List
Chainlink
Chainlink (LINK) is the leading blockchain oracle project in the market. Chainlink is a multi-chain oracle network that provides accurate and verifiable real-world data for smart contracts. Chainlink’s decentralized oracle network connects smart contracts to price feeds, asset feeds, weather data, sports feeds, shipping data, and more.
UMA
UMA (UMA) is a decentralized oracle that allows users to deploy and trade synthetic assets on ETHereum by leveraging an “optimistic oracle” to interact with off-chain data. An optimistic oracle serves data to smart contracts through a flexible feature that offers a dispute resolution mechanism for inaccurate or manipulated data.
WINkLink
WINkLink (WIN) is the first TRON ecosystem decentralized oracle that aims to fully integrate off-chain events with the blockchain network. WINkLink will provide external data such as price feeds, events, and access to payment rails as well as offer reliable, unpredictable, and unverifiable random numbers.
API3
API3 (API3) is a DAO that creates an API for DApps known as dAPI. dAPIs are decentralized API services designed by combining multiple operators and running Oracle needs free of counterparties.
Band Protocol
Band Protocol (BAND) is a cross-chain decentralized oracle that aggregates and connects off-chain data and APIs to smart contracts. Band oracles can be used across multiple blockchain networks and allow for flexible, efficient, and scalable data queries secured through cryptographic proofs.
Advantages of Decentralized Blockchain Oracles
Reliable Data: Decentralized oracle networks work by aggregating multiple data points to arrive at one single point of truth. Combined with off-chain computation, smart contracts can acquire accurate data that has been sought from multiple off-chain resources and computed to arrive at the most accurate data.
Trust: Decentralized oracles rely on data from multiple independent sources and therefore achieve trustlessness.
Disadvantages of Decentralized Blockchain Oracles
Third-party collusion: Since decentralized oracles rely on multiple external sources to pull information on-chain they are susceptible to third parties colluding to manipulate data or perpetrate fraud.
Long duration: The time taken to aggregate data from multiple sources and arrive at a consensus on the outcome is longer when compared to centralized blockchain oracles. If all the network oracles need to reach a quick consensus then the speed of individual oracles is the determining factor.
Cost: Decentralized oracles are considered ideal for protocols with multiple functions running at different times but require a high investment in infrastructure and maintenance costs.
Closing Thoughts
A reliable mechanism that facilitates communication between smart contracts and the external world is vital to the global adoption of blockchains. Without blockchain oracles like those in the crypto oracles list above, smart contracts would have to rely only on information already within their networks, which would considerably limit their capabilities.
Decentralized oracles have the potential to introduce safeguard mechanisms that could eliminate a lot of systemic risk from the blockchain ecosystem. Blockchain oracles remain one of the critical building blocks to be implemented in a secure, reliable, and trustless manner for the blockchain ecosystem to grow.
