Blockchain oracles or oracle crypto as many call them, have begun to interest more and more people. Unfortunately, not enough know exactly what those are and what they are doing. In this article, we will explain everything there is to know about them. For starters, blockchain oracles are third-party services that nourish smart contracts with outside information. To put it more simply, they create a link between the blockchain and the real, outside world.
Such services are needed because smart contracts and blockchains are not able to access external data, also called off-chain data. However, information from the outside world is mandatory for the execution of various agreements. Blockchain oracles do exactly that and without them, smart contracts would be extremely limited. That’s because they would only have access to internal network data and therefore stay behind and stop evolving with the world.
More on oracle crypto or blockchain oracles
It’s mandatory to note that the blockchain oracle does not actually represent the source of the data. It is a filter between the outside world and the blockchains because it also verifies and authenticates the information it receives. There are also certain types of oracles that not only send info to the blockchain but can also send info from the blockchain back into the real world. Blockchain oracles operate differently depending on the purpose they have been created for.
To put it simply, when two friends make a bet, they lock their funds within a smart contract. But that is not enough because that smart contract cannot possibly know who won the bet based on real information. That’s where such an oracle comes in. It queries a trustworthy API to find out what was the outcome of the activity that they placed a bet on. According to what it learns, it sends the funds to the winner.
Types of blockchain oracles
Blockchain oracles or oracle crypto can be categorized into a few types, depending on various criteria. The most important types of blockchain oracles are:
- Software and hardware oracles;
- Inbound and outbound oracles;
- Centralized and decentralized oracles.
Besides these main types, there are also contract-specific oracles. These can only be used by a unique smart contract. So, in case someone has multiple such contracts in place, they will have to create a contract-specific oracle for each of them. This is a rather expensive type of oracle and one that companies do not use. However, the good thing about them is that an individual can create and modify them according to a specific purpose. This offers more flexibility and can make those oracles a lot more precise.
Then there are also human oracles. People who research or who have specialized knowledge do this and also verify the authenticity of the information. A human oracle verifies its identity through cryptography. This means that not a lot of people can fake their identities and provide forged info to the blockchain.
The Oracle Problem
There are also downsides to oracle crypto or blockchain oracles. The phenomenon known as the Oracle Problem happens when a smart contract needs to be compromised because its oracle has been compromised. There is also the risk of a third party gaining access to the flow of information between the contract and oracles. These actors can modify, destroy, or forge the data, therefore compromising a smart contract.
These oracles are extremely useful in the blockchain and smart contract industry. They provide a link between the real world and the network. However, as we have seen, there are risks associated with them, like with virtually any other thing.
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