As blockchain technology continues to seep into mainstream use, connecting smart contracts with real-world applications continues to be a challenge. If you’re not yet familiar with them, smart contracts are a type of self-executing contract where the terms of the agreement are directly expressed as computer code. They have gained popularity in recent years thanks to the security and immutability provided by blockchain technology.
However, while blockchain tech does make smart contracts more secure, it also puts up a barrier that restricts how they can interact with external data sources, application programming interfaces (APIs), and legacy technology systems, limiting the usefulness of any “smarts” these instruments might have. This is where blockchain oracles come into play.
Oracles are systems or services that bridge the technology gap between on-chain blockchain data and off-chain real-world information. Once implemented, they allow smart contracts to interact with other systems, allowing for several useful real-world applications.
Let’s look at some important key points of these emerging technologies:
1. They Allow for Truly Practical Blockchain Apps
Blockchain oracles are now essential for enabling decentralized applications (dApps) to function within the outside world. For instance, a logistics provider might set up a smart contract with an oracle to automatically trigger warehouse fulfillment and shipping processes once they receive a correct fund amount in a crypto wallet, provided the coin provides native smart contract support.
With privacy coins like Monero (XMR), the process is a little different. An oracle can query the Monero blockchain to confirm the transaction in a privacy-preserving manner after funds have been shifted from a Monero wallet to some other wallet with smart contract support.
Being able to affect real-world things in real time with blockchain tech can be useful in a wide range of industries. Today, finance, supply chain management, and insurance players now use oracles as part of their daily processes, and the technology could feasibly find its way into sectors like cybersecurity.
2. There are Several Types of Blockchain Oracles
Oracles can be classed according to their main function:
- Software oracles: These fetch data from online sources. Typical use cases include getting weather reports or stock prices.
- Hardware oracles: These interact with physical devices, particularly those with Internet of Things (IoT) sensors.
Furthermore, they can be divided according to whether they facilitate inbound or outbound data, as follows:
- Inbound oracles: They bring external data into the blockchain.
- Outbound oracles: They send data from within blockchain assets to external systems.
Oracles can also be centralized or decentralized, with the following definitions:
- Centralized oracles: These are controlled by a single entity.
- Decentralized oracles: These systems rely on multiple sources to verify data accuracy, avoiding triggering events due to errors in the sources. These are generally more desired since they also prevent malicious activities involving the tampering of data sources.
3. They Are Not Native to Blockchain
Unlike smart contracts, oracles are not built into most blockchain architectures. As of now, they operate exclusively as third-party services, which means they introduce an external layer that can be exploited if not properly secured. Their reliance on external data sources can raise questions about trust and security in certain applications.
4. Oracles Introduce Trust Challenges
While blockchain networks are decentralized, some oracles are centralized, creating an identifiable point of vulnerability. If an oracle is compromised, the entire smart contract ecosystem that relies on it could be compromised without the need to attack the still-immutable contracts themselves. This has given rise to the “oracle problem,” a philosophical and technical issue that undermines the basic trust model of blockchains.
5. They Call for Verifiable Data and Proof
Similar to blockchains themselves, some blockchain oracles use cryptographic proof to ensure that the data off-chain is accurate and tamper-resistant. These tools can provide a layer of trustworthiness that solves the oracle problem, making smart contracts safer for use in finance and other high-stakes industries.
6. They’re Crucial for Decentralized Finance (DeFi)
Regardless of the ongoing trust challenges, oracles have proven themselves in the modern DeFi ecosystem, particularly by providing price feeds for various assets. Lending platforms, decentralized exchanges (DEXs), and other DeFi hubs typically use oracles to ensure that asset values are accurately reflected throughout the network.
7. They Involve Cross-Chain Compatibility
Blockchain oracles are now generally designed to be cross-chain compatible so that they can transfer data to and from multiple blockchains simultaneously. This makes sense, since the development of oracles is driven by convenience. As more oracles are developed with cross-chain compatibility in mind, we’ll see the evolution of a more connected decentralized blockchain ecosystem.
What Comes Next for Blockchain Oracles?
With few real alternatives on the horizon, blockchain oracles are probably going to be just another fact of life when smart contracts and decentralized apps become mainstream. The way these technologies close the gap between blockchain technologies and the real world suggests that they will play a critical role in shaping our world for the next several years.
Some real-world applications may include:
- Wider integration with AI and IoT. As artificial intelligence (AI) and IoT continue to expand, blockchain oracles will become more integrated with these technologies to create smart systems. Logistics businesses are already doing this, and we’re likely to see the practice spread to other industries as new blockchain and oracle ecosystems are further validated.
- Ballot counting. Oracles can be used to facilitate secure voting systems, paving the way for intimidation-free voting and effective governance.
- Real-time insurance and risk management. Blockchain oracles may enable real-time, automated claims processing for insurers, potentially saving the industry trillions of dollars. Oracles could conceivably fetch data such as weather conditions, flight statuses, or natural disaster alerts to trigger automated payouts for insurance claims, reducing fraud and speeding up key processes in this industry.
Knowing just how oracles will change the future should give both future and current blockchain holders a better understanding of what they should do moving forward. Given that virtually everyone is now affected by smart technologies, logistics, governance systems, and insurance, it makes sense that we should all look into oracles and blockchains, even if we may not have a direct stake in them right now.
