What are oracles? Oracles are a third-party service used to deliver specific information to smart contracts. Think of them as a bridge for necessary data between the outside world and the blockchain, between off-chain data and on-chain data. Keep in mind the oracle itself is not actually the data, but rather the layer that requests, verifies, and authenticates the data, and then relays said-data in real time to the smart contract.
Where Oracles Are Needed
Most dApps and layer 2 applications, as well as their mainnet blockchain (such as Ethereum) desperately need the use of oracles. Without oracles, these networks can only function based on on-chain data and information, with zero access to any real-time data from the outside world.
The use of these oracles is to bridge mass-information to a network instantly, essentially anything that is requested from an application or person using the network.
Several other areas in crypto where oracles are needed:
DeFi ecosystems require oracles in order to determine individual borrowing capacity, maintaining liquidity to match the market price to provide maximum capital, and accessing asset and market data.
NFTs use oracles to make them multi-dimensional. The ability for an NFT to change appearance, value, capabilities, or characteristics based off randomness or another set of circumstances is all computed with oracles.
Oracles connect institutions, companies, and enterprises to blockchains, allowing them to quickly deploy assets, use applications, and upload data without the need to use resources and spend time building a compatible interface for blockchains.
The Issue Oracles Face
Traditional oracles are centralized and thus are a bottleneck problem when it comes to the realm of decentralization, meaning they open a single point of failure – a vulnerability that goes against the very nature of decentralization. An oracle owner could potentially feed inaccurate data in order to manipulate smart contracts in their favour.
This is why oracles must be decentralized and automated via independent nodes, which requires the difficult task of creating entire new oracle systems, and then recalibrating them for individual projects or making them fully adaptable. Progress is being made, but the oracle issue isn’t solved yet.
Different types of Oracles
Inbound Oracles transmit data from external sources to smart contracts.
Outbound Oracles perform in the opposite direction, sending information from a smart contract to the external world.
Software Oracles source all their information from online databases and servers, such as flight and public transport information, real estate valuations, road incidents, or football game scores.
Hardware Oracles require information directly from the real world in order to send that information to a smart contract. Supply Chain such as a sensor detecting that a ship has entered the port or goods have been processed through a supply depot are just a few examples of hardware oracles in action.
Contract Specific Oracles are built for activity involving singular smart contracts, or in other words, they specifically cater to independent smart contracts operating in unique circumstances.
Consensus-based Oracles use human consensus and prediction markets to gather their information, implementing a rating system to avoid market manipulation or false representation of the data.
What Are The Leading Blockchain Oracle Projects
Without a doubt, Chainlink is the king of oracle networks right now, with a market cap of over $5.7 billion USD, compared to the second largest oracle network – Bridge Oracle – with a market cap of $157 million USD. Chainlink has been proliferant in building up its capabilities in the deploitation and integration of oracles to blockchain networks over the past few years. It now dominates the space and sets the standard for any competing oracle network.
API3 is another oracle network we’ve mentioned before, a project pioneering the creation of decentralized APIs, as well as specializing in scaling and monetizing them. Augur and Nest Protocol are two other worthy-of-mention oracle networks on the rise.