What Is a Blockchain Oracle?

Hello, this is Bitpunk! Today we'll look at oracles, which play an important role in blockchain technology.

An oracle acts like a bridge between the blockchain and the outside world. Put simply, it's a tool that lets a blockchain use outside information.

What is an oracle?

A blockchain is basically a closed system. It can't access outside data directly. This is where oracles come in. An oracle brings data from the outside world onto the blockchain.

For example, imagine a blockchain platform where people bet on the results of sports matches. To pay out winnings based on the result, the smart contract needs outside data to work with.

Here, the oracle takes on the role of fetching data from a trusted source and delivering it to the blockchain.

Why do we need oracles?

As we saw in the example above, a blockchain can't interact with outside data directly, so oracles are used to solve this problem.

The core role of an oracle is to let the blockchain use outside data while keeping its security intact. This way, the blockchain can make use of more data and be put to a wider range of uses.

Types of oracles and how they're used

Depending on their role, oracles can be roughly divided into three types. Here are the main types of oracles and examples of how they're used.

1. Input oracles and DeFi

Input oracles bring outside data onto the blockchain. For example, they bring financial market data onto the blockchain so that smart contracts can use it. This allows smart contracts to operate based on real financial data.

The DeFi ecosystem uses oracles to bring financial data onto the blockchain and offer a variety of financial services. For example, a lending platform checks asset prices through an oracle and decides each user's borrowing limit. This makes it possible to offer safer and more efficient financial services.

2. Output oracles

Output oracles send data from the blockchain to outside systems. For example, a smart contract can send payment requests to bank and corporate systems, or instruct an IoT system to carry out a specific task. This lets outside systems make use of blockchain data as well.

Insurance smart contracts can use oracles to verify outside data when a claim is filed and automate the payout process. For example, with accident insurance based on real-time traffic data, an oracle can verify the traffic data for the area in question and pay out the insurance money automatically.

3. Cross-chain oracles

Cross-chain oracles let different blockchains exchange data with each other. This makes interaction between blockchains possible and lets assets and data move freely.

How oracles earn trust

An oracle's trustworthiness is extremely important, because it's directly tied to the reliability of the smart contract.

An oracle's reputation is usually judged by its track record. Users can rely on this to choose a trustworthy oracle service.

Among these, well-known oracle services include Chainlink and Pyth Network.

Wrapping up

Oracles expand what blockchain networks can do and help them use outside data safely. Through oracles, blockchains can use more data and be put to a wider range of uses.

Looking ahead, I expect that hybrid smart contracts powered by oracles may bring innovation to many different areas of society.