What are blockchain oracles?

A blockchain oracle is a third-party service that shares data from the outside world with smart contracts. The oracle verifies and authenticates data through trusted APIs. Smart contracts can then utilise the information to make decisions. 

Blockchains cannot simply access off-chain data, so oracles become critical when real-world data is necessary to execute an agreement or contract. 

Outbound oracles bring blockchain data to the outside world, while inbound oracles bring off-chain data to the blockchain.

Why is there a need for blockchain oracles? Oracles help navigate the outside world instead of having to rely on centralised data sources. An oracle is an intermediary or ‘middleman’. The ultimate goal is to bring off-chain data to on-chain smart contracts. 

Blockchain oracles explained

Some people describe blockchain oracles as blockchain “middleware” between the off-chain and on-chain worlds. For example, if a prediction platform wants to settle a bet regarding an election, a blockchain oracle can help that smart contract platform settle that bet automatically.

Oracles act like an API and transmit outside data to the closed blockchain system. Whether it’s market information, the weather, a temperature sensor, a payment or another external event, the blockchain oracle ‘listens for’ and authenticates the data.

Blockchain oracle examples

There are many different types of oracles. For example, there are hardware oracles, which transmit information from the physical world. Let’s say there’s a blockchain that tracks clothing and its location. The radio-frequency identification technology used to track the clothing can use a hardware oracle to transmit the data.

A software oracle might deliver real-time information, like stock prices, exchange rates or flight times. 

There are centralised oracles, which, because the blockchain wasn’t meant to rely heavily on third parties, some refer to as “the oracle problem”. Centralised oracles could interfere with the blockchain’s decentralised nature.  

What are some other examples? Well, a blockchain oracle can verify the completion of a payment, price information, election outcomes and more. The oracle can verify this data and transmit it back to settle a bet or unlock a new smart contract.

Blockchain oracles are prevalent on Ethereum applications. Chainlink, one of the most popular cryptocurrencies, markets itself as the world’s most widely used blockchain oracle network for hybrid smart contracts. Augur, a prediction platform, also uses blockchain oracles. 

Blockchain oracle meaning

It’s important to remember that blockchain oracles are the layer that verifies the outside data and not the data source itself. Some oracles don’t only send data to the blockchain, but to other external sources as well.

Without blockchain oracles, smart contracts would have no access to the real-world information that will help spur global blockchain adoption. They are critical to the overall blockchain ecosystem.