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Blockchain101: What is Oracle?

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2022-07-18
Blockchain101: What is Oracle?

The use for oracle has been on the rise in blockchain, especially last year. So what is oracle and its role in a blockchain environment? Why do we need it so smart contract can work?

The self-contained nature of blockchain

Blockchain is hailed as the technology of the future owing to its ability to store and deliver data in a fast, secure, transparent, and immutable manner. Despite the apparent advantages, blockchain has one weakness, that is all data on the blockchain are self-contained.

The word “self-contained” may be a little bit confusing to some of you so let me break it down.

Blockchain is a decentralized system functioning in a way that allows each node in a network to arrive at the same result with the same input. This means that if A sends B $5 using a certain blockchain network, $5 will be deducted from A’s account and added to B’s account no matter when, no matter what node the transaction is executed on (same input – same result). To achieve this, all data stored on the blockchain (on-chain) are intentionally designed to be isolated from external sources (off-chain).

While the self-contained nature of blockchain gives it some of the most valuable characteristics such as consensus on the validity of transactions, mitigation and optimization during network downtime, etc., it prevents blockchain from accessing the readily available vast pool of real-world data on its own. If not connected to such off-chain information, blockchain is heavily limited in its operation and application. Actually, if blockchain is to have any real-world application at all, it is imperative it have access to real-world information. Moreover, the interoperability of blockchain is essential to the exchange of blockchain data and blockchain adoption.

These two reasons are why blockchain needs a bridge to interact with off-chain data in a way that is secure and does not interfere with the inherent decentralization nature. Such a bridge is called “oracle”.

What is oracle in blockchain?

The word “oracle” has its origin from Greek mythology and it is used to call somebody who is able to communicate with deities to learn prophecies. In the ancient world, oracles were often considered the source of wisdom that people turned to when they needed to make a decision.

In the blockchain environment of the modern world, oracle does not have any connection with any supernatural forces, but it does provide blockchain with endless real-world information to help smart contracts execute.

One thing must be made clear is that blockchain does not feed the data into the internal blockchain environment (which will meddle with the normal execution of the blockchain), but rather, when a smart contract runs and needs data from off-chain sources, a set of codes in that smart contract will call for information from oracle and oracle will provide the data from external sources in a way that the blockchain understands.

It is also important to note that oracle is not the data source itself, but is the bridge that connects on-chain and off-chain environments.

With the utilization of oracle, blockchain applications can uphold their unique properties while expanding on the types of digital agreements that they can process.

A few examples of blockchain applications that need oracle include:

  • Sports betting platforms that need match results from real life to determine the winners

  • Exchanges that require prices and exchange rates of different crypto assets

  • IoT systems that demand data from sensors

  • Supply chains that call for data from various vehicles, processes, and sources

  • Blockchain games that demand randomness

Types of oracles

Centralized versus decentralized

A centralized oracle is controlled by one entity and it is the only provider of data for a certain smart contract. The use of centralized oracle requires trust in a third party, and reintroduces a single point of failure back into a decentralized system. This trust conflict between the decentralized smart contract and the centralized oracle is called “the blockchain oracle problem”.

With a centralized oracle, a smart contract is more susceptible to vulnerabilities and attacks with either compromised data or compromised oracle, or both.

A decentralized oracle solves the issues of a centralized oracle as it does not encounter the counterparty risk. It improves the reliability of the data feeds by not relying on a single source of data provider, thereby increasing the security and fairness of smart contracts.

An oracle can be decentralized in one or any combination of the following three levels:

  • Data source

  • Node operator

  • Oracle network

The more decentralized an oracle is, the more distributed the risk and the fairer the smart contract is.

Inbound versus outbound

An inbound oracle feeds data from off-chain to on-chain system. For example, data collected from sensors of an IoT system will be given to a smart contract by an inbound oracle.

On the other hand, an outbound oracle transmits data from blockchain to external sources. For example, the smart contract may send commands to an IoT system to open the lock to a house once the rental is paid via blockchain.

Software versus hardware

A software oracle connects information on blockchain and other digital sources (website, databases, etc.), while a hardware oracle provides data from real-world (sensors, scanners, etc.) Data transmitted by a software oracle include digital asse t prices, exchange rates, etc, and those delivered by a hardware oracle include weather conditions, traffic statuses, etc.

Top 5 blockchain oracles

More and more blockchain oracles are coming to the market but these top 5 are the most popular and overall most advanced today.

Chainlink

In the blockchain scene, Chainlink is almost synonymous with oracle. It is the biggest by market cap and by number of users. Starting out on Ethereum, now Chainlink can be integrated into most public blockchains. It can provide a lot of critical off-chain data to complex smart contracts. The Chainlink team is also very responsive and supportive of their users and partners. Their ecosystem runs like a well-oiled machine. It is not hard to see why they achieve what they have and why they can do even more great things in the future.

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Universal Market Access

Universal Market Access (UMA) is the second largest oracle by market capitalization. UMA focuses on the financial derivatives market, and they want to make trading easier and more accessible to all. They require fewer calls to work, which means less fees and lower chance of attacks to the blockchain. However, UMA mainly works with Ethereum and Layer-2.

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WINkLink

WINkLink is the first oracle built on the TRON blockchain for TRON projects. The integration process for WINkLink is simple and transparent, as every information you need is available on their websites. Though they are only 2 years old and currently support only TRON, they stand at the third place for top oracles in terms of market cap. This shows the massive potential of WINkLink as a blockchain oracle.

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Band Protocol

Band Protocol is another widely used oracle with a massive market cap. Band Protocol is built on Cosmos, but currently supports Polkadot and Ethereum as well. Their list of partners comprises big names in both the crypto market and traditional markets alike, some of which are Google, Coinbase, Binance, FTX, Uniswap, etc.

Trade BAND on Bitget here.

iXec

iXec has a very unique feature that allows everyone to build their own oracles from scratch in no time in a web browser. They have step-by-step intuitive instructions on their website in both text and video formats, making it very easy to follow. Those who verify oracle data of iXec get to earn in RLC, their native token. Making oracles accessible to every blockchain is definitely the strength of iXec.

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Closing thoughts

Blockchain mass adoption is simply impossible without the help of oracle. Blockchain technology may have introduced a fair, secure, trustless, and transparent way to store and process information, but that comes with a cost of self-containing. Oracle alleviates that weakness and broadens the potentials of blockchain application.

In recent years, as blockchain grows and the need for oracles increases, many blockchain projects have developed advanced decentralized oracles. Some of them include Chainlink, Universal Market Access, WINklink, Band Protocol, and iXec as mentioned above. The development of oracles and the growth of blockchain, as a result, is endless.

Disclaimer: All products and projects listed in this article are not endorsements and are provided for informational purposes only.

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