In these days, Oracles play a major role in the crypto world because they solve the problem of connecting blockchain to the external data sources, in other words, Oracles are any device or entity that connects a deterministic blockchain with off-chain data. They also relay messages and instructions from a smart contract to off-chain external systems. Moreover, Oracles must ensure that their provided data is accurate and resistant to manipulation. Some oracles not only transfer information to smart contracts but also send it back to external sources.
Types of oracles
- Software oracles: Software oracles process data from online sources — for example, temperature, flight delays, cryptocurrency rates, prices of goods. The oracle extracts the necessary data from the Internet and pushes it in a smart contract.
- Hardware oracles. Some smart contracts require to interact with physical sources to receive information, such as sensors, to figure out the temperature outdoors, or RFID sensors in the supply chain industry.
- Inbound oracles. They provide information from the external world and transmit it to the blockchain.
- Outbound oracles. They send information from the blockchain to the outside world. An example would be services which are used when checking a payment status.
- Consensus-based Oracles
Using only one source of information could be risky and unreliable so sometimes an expert or human consensus must additionally check information coming from external sources. To avoid market manipulation, prediction markets implement a rating system for oracles.
Why does Blockchain need Oracles?
Smart contracts work on a decentralized network such as blockchain and are used to automate all kinds of transactions. Smart contracts remove the need of third parties in the blockchain technology and make it become more transparent and decentralized. Blockchains and smart contracts are known as off-chain data as they don’t have access to on-chain information. Blockchain oracles improve the capabilities of smart contracts and provide them access to more outside data sources which could endanger security for users and applications.