What are blockchain oracles?

Blockchain oracles are organisations that link blockchains to other systems, enabling smart contracts to run based on inputs and outputs from the real world. The Web 3.0 ecosystem now has a way to link to legacy systems, data sources, and sophisticated computations.

When off-chain infrastructure and on-chain code are combined to create complex decentralised apps (DApps), decentralised oracle networks (DONs) make it possible to develop hybrid smart contracts that respond to real-world events and communicate with legacy systems.

Blockchain relies on consensus as a method for reaching an agreement on data values, and determinism is necessary for nodes to establish consensus. Some of them, like proof-of-work (PoW) with Nakamoto consensus and proof-of-stake (PoS) with Byzantine consensus, could be recognisable to you. Consensus is one of the key elements that make blockchain function in the first place.

The blockchain community must nevertheless interact with the real world. We must enter the price of Ether (ETH) and other altcoins into a contract in order to have DeFi. In order to provide decentralised, trustless insurance, we need meteorological data. We need data to use blockchain for smart contracts, one of its most important applications. How, then, do we connect the worlds under this restriction?

The purpose of this tutorial is to introduce several blockchain oracle initiatives, discuss the blockchain oracle challenge, and describe what blockchain oracles perform.


Blockchain oracle problem

The problem with the blockchain oracle brings to light a crucial limitation of smart contracts: they are completely cut off from data and systems outside of the blockchain context in which they were created. Data now stored on the blockchain is referred to as "on-chain," whereas external resources are referred to as "off-chain."

By being purposely cut off from external systems, blockchains are able to accomplish their most advantageous characteristics, including the prohibition of double-spending attacks, broad agreement on the veracity of user transactions, and a decrease in network downtime. You'll need an additional piece of infrastructure known as an "oracle" to securely communicate with off-chain services from a blockchain and to span two environments.

Solving the oracle problem is crucial because the vast majority of smart contract use cases, including DeFi, demand knowledge of real-world data and off-chain occurrences. By offering a universal gateway to off-chain resources while upholding the blockchain's fundamental security features, oracles, therefore, expand the types of digital contracts that blockchains may support.

A few of the sectors that benefit from the integration of oracles with smart contracts are asset prices in banking, identity verification in government, unpredictability in gaming, and weather data in insurance.


What do blockchain oracles do?

Blockchain oracles are any devices or entities that link deterministic blockchains to off-chain data. In these oracles, each data input is passed through an external transaction.

However, we can be sure that the blockchain has all the data required for this kind of self-authentication. As a bridge between the two worlds, oracles are viewed as blockchain middleware.

Chainlink has become the industry standard for decentralised oracles since it solves the issues of centralising smart contracts and gaining access to external data. What exactly are Chainlink Oracles, then?

Chainlink is a decentralised oracle network that provides blockchain smart contracts with real-world data. Digital asset tokens called LINK tokens are used to compensate for network services.

A singular point of failure, on the other hand, is the specific issue that a decentralised, blockchain-secured smart contract is meant to address. So, if the oracle is broken or corrupted, how would you know if your data is accurate? What use is a blockchain-based smart contract that is trustworthy and safe if the data it is based on is questionable?

Chainlink, a decentralised network of nodes, offers a solution to this issue by utilising oracles to deliver data and information from off-blockchain origins to on-blockchain smart contracts. This method eliminates the reliability issues that could develop if only a single centralised source is employed, together with other security technology.

Chainlink connects all significant public and private blockchain settings using a common framework, providing a usual abstraction level for cross-network communication, making it blockchain agnostic.

Decentralized data that has previously been taken from the actual world and gathered through services like Chainlink, which is like a public library but for decentralised data, can therefore be found on-chain. To get the precise information you need, you can even design your own modular oracle networks. You can also send data outside of the blockchain and execute off-chain calculations.