Understanding Blockchain Oracles: Explained – Cyber Bee

What is a Blockchain Oracle ?

Blockchain oracles are third-party services that provide smart contracts with external information by acting as a bridge between blockchains and the outside world. Oracles are invaluable because they provide access to relevant data from outside the network, which blockchains and smart contracts cannot. This broadens the scope of what smart contracts can do, enabling more functionality and more efficient contractual agreement execution.

Smart contracts would be useless without blockchain oracles because they could only access data from within their networks.

It’s significant to recognise that a blockchain oracle is not the data source itself but rather the interface that investigates, affirms, and verifies external data sources and afterwards passes on that information. The data sent by oracles can take various structures – cost data, the productive result of an instalment, or the temperature estimated by a sensor. To get data from outside sources, a smart contract must be triggered, and network resources have to be used. Additionally, some oracles have the capability to communicate information not only to smart contracts but also to external sources.

For instance, John and Emma can use a smart contract to place a wager on the outcome of a football match. The total sum of $100 is held in escrow by the smart contract, with Emma betting $70 on team X and Jhon betting $30 on team Y.

To ensure that the smart contract knows which team wins, an oracle mechanism is required to retrieve and securely deliver accurate match outcomes from off-chain sources to the blockchain. Integrating this oracle mechanism into the blockchain network ensures that the smart contract can execute conditional actions based on real-world data, maintaining the integrity and reliability of the decentralized application.

So why are Blockchain Oracles so important?

Oracles are a critical part of most blockchain applications, as they provide a connection between the blockchain and external data sources. Without oracles, blockchains are isolated and unable to respond to external events. Therefore, it is clear to see why oracles are essential for blockchain functionality, as they enable the blockchain to interact with the outside world and be impacted by it. There are numerous use cases for blockchain oracles, making them invaluable to many blockchain systems.

Added functionality

• Blockchain oracles add extra functionality to the blockchain by providing external data to enable more complex operations. This makes it possible to use blockchains for a wide range of activities such as purchasing, trading, gambling and investing, giving them greater flexibility and power. As a result, more people are turning to oracles to make the most of blockchain technology in their everyday lives. Centralized oracle provide reliable data from trusted sources, while decentralized oracles ensure transparency and security through distributed consensus mechanisms, catering to diverse user needs and preferences in blockchain applications.

Agile Parameters

• Oracles come in a range of styles and offer an unrivalled level of flexibility. You can configure them to carry out just about any task you require, whether that be repeating an action or executing it only once. They can provide passive updates or take action in the blockchain on your behalf. This versatile nature is a major draw for oracles, as it allows them to be used in multiple scenarios and tailored to specific needs. Setting up an oracle, even for complicated tasks, is much easier compared to other blockchain tools.

Time-saver

• He benefit of using oracles is that they provide automation which eliminates the need to manually initiate transactions on the blockchain. By setting up an oracle, it is possible to have a smart contract carried out in response to an external trigger. This simplifies tasks which would otherwise require constant monitoring, such as buying tokens when a crypto falls to a certain price or creating new NFTs for a game.

Problems Facing Oracles

Smart contracts are essential for a successful blockchain system, as many of them are based on data from oracles. However, this also brings with it a major issue known as The Oracle Problem, which occurs when an oracle is compromised, thus compromising the smart contract that relies on it. Since oracles are not part of the blockchain consensus, the trustless execution of smart contracts is compromised. Additionally, man-in-the-middle attacks can be used to modify or falsify data between the oracle and the contract, further increasing the risk.

The Oracle Problem remains an unsolved issue, representing a challenge in designing oracles. Centralized and decentralized oracles each present unique challenges and trade-offs in terms of security, reliability, and scalability. Addressing these challenges is crucial for enhancing the trustworthiness and effectiveness of blockchain-based applications that rely on accurate off-chain data.

Another problem is that a blockchain does not typically incorporate an oracle directly. Instead, it is a third-party process that necessitates that a user collaborates with an external provider in order to be connected to the blockchain. This can result in centralisation problems as the main purpose of decentralisation is to give power to the users. As most oracles are operated by single entities, they can end up giving control to parties that may not have the user’s best interests in mind.

For instance, if Chainlink, which is the biggest provider of blockchain oracles, is acquired by a financial institution, then it could mean the user’s finances are once again being managed by a vast, bureaucratic organisation. Additionally, if a malicious oracle is given access to the crypto accounts or other assets of a user, it could lead to disastrous results. To avoid these risks, users should choose trusted oracles and use decentralised oracle providers based on blockchains.

Types of Oracles

The various types of blockchain oracles can be divided based on their function. These can range from outbound oracles to software oracles, providing many uses.

It’s common for an oracle to be a combination of multiple types, so understanding the different kinds available is key to finding the best one for your needs.

1. Human OraclesIndividuals with specialised knowledge in a certain area can act as oracles, researching and confirming the accuracy of info from multiple sources and then translating it into smart contracts. The use of cryptography to verify the identity of a human oracle means there is a low risk of fraudulent activity and corrupt data being supplied.
2. Hardware and Software OraclesMost crypto oracles analyse digital data, though this isn’t always so. Hardware oracles provide data from the physical world, while software oracles deliver information from digital sources like websites, servers or databases. Further, hardware oracles can relay data from motion sensors and RFID sensors. Software oracles can offer real-time data like currency exchange rates, cost variations and travel info.
3. Inbound and Outbound OraclesInbound oracles send data from external sources to smart contracts, while outbound oracles send information from smart contracts to the outside world. For instance, an inbound oracle could provide a smart contract with the temperature sensed by a sensor. An outbound oracle can be thought of in relation to a smart lock. If funds are deposited to an address, a smart contract can send this information through an outbound oracle to open the lock.
4. Centralised OraclesCentralisation can refer to both a controlling entity and a sole source of information. In some cases, an oracle can be considered centralised if it is set up and managed by a single individual or group or if it only receives data from one source. While some level of centralisation may be necessary for certain blockchain oracles, it can be a risk, as a single incorrect piece of information or malicious actor could have a damaging impact on the entire system.
5. Decentralised OraclesDecentralising oracles can help diminish certain risks by enabling blockchain oracles to run without needing to trust that all parties are honest and legitimate. Nonetheless, setting up a decentralised oracle can be difficult. To make a completely decentralised oracle, multiple network participants are required to form a consensus before forming smart contracts and also taking advantage of multiple data sources. Consequently, a third-party blockchain may be essential for managing the oracle.
6. Computation Oracles Both an inbound and outbound aspect is present in computational oracles. These oracles take in data from the blockchain, operate on it off-chain, and then feed the result back into the blockchain. This approach offers a cost-effective way to access off-chain data solutions and reduce gas fees. Decentralized oracle networks further enhance security and reliability by leveraging distributed consensus mechanisms, ensuring that the data fed back into the blockchain is accurate and trustworthy.
7. Contract-specific Oracles Creating multiple contract-specific oracles in order to deploy more than one smart contract is time-consuming and not recommended. It is more efficient to use a single oracle that can work with all smart contracts, as opposed to building separate ones for each one. In most cases, the use of contract-specific oracles is inconvenient and should only be done if absolutely necessary to access external data. Centralizing oracle functionality can streamline integration, reduce maintenance costs, and ensure consistency in data retrieval across multiple smart contracts within a blockchain ecosystem.

Oracle Usage Examples

Blockchain oracles, acting as a connection between blockchains and off-chain data, have numerous potential applications. As their use becomes more pervasive, they have the capability to revolutionise many blockchain-driven industries.

DApps

• The advantages of oracles are especially evident when it comes to decentralised applications (DApps). DApps are useful tools that enable everyday users with minimal technical expertise to interact with the blockchain. They offer day-to-day services while still allowing users to maintain control of their data. Oracles have broadened the abilities of DApps far beyond what they were originally designed for, thus making it possible to utilise DApps in a much wider range of scenarios. From insurance policies to financial forecasting markets to social media, you can find DApps to suit almost any purpose.

DeFi

• Oracles are essential for any serious decentralised finance (DeFi) system. The core concept of DeFi is providing financial services without allowing any single institution to control them. Blockchain oracles make it possible to use crypto for a variety of tasks, from buying a house to managing retirement. As a bridge, oracles ensure that real-world information guides smart contracts. Whenever cryptocurrency is used to receive payments, seek a loan, or for any other purpose, oracles are a critical tool.

NFTs

• With the growing popularity of Non-Fungible Tokens (NFTs), there are challenges that arise when connecting them to off-chain activities. NFT enthusiasts usually leverage the blockchain for registering assets and trading them. But this could present issues when attempting to incorporate off-chain data. Take sports-themed NFTs as an example. If an individual wanted to generate a digital NBA card for players who have achieved a certain number of shots, would it have to be done manually? Oracles allow the quick creation of NFTs associated with specific events in the real world.

To Conclude

Crafting a reliable infrastructure to support communication between smart contracts and external resources is essential for the worldwide adoption of blockchain technology. Without oracles, smart contracts will lack the capacity to reach their full potential as they would only be reliant on on-chain data for operation.

Different portals are providing blockchain classes centred on oracle implementation within a decentralised system. By means of decentralised oracles, blockchain networks can effectively decrease numerous system risks and functional constraints.

Moreover, the growth of blockchain oracles can help provide users with a secure, safe, and trustless interface to develop and thrive within the decentralised economic network.