Blockchain Oracles – Types, Uses and How They Work

For businesses needing a secure solution to bring multiple parties and share data in real time, understanding blockchain oracle is crucial. Oracle is a protocol that bridges blockchain to real world, thus allowing smart contracts to execute based upon inputs and outputs from the real world.

In layman’s terms, they act as a bridge connecting smart contracts to the real world, allowing trusted information based on outside-world sources like price feeds, real-world events, or even web APIs to go beyond the blockchains. Precisely, without oracles blockchain, smart contracts are just confined to processing what’s already there on-chain.

Herein, we’ll explore blockchain oracles and their types in detail: why they are considered game-changers, practical apps, and their potential vulnerabilities. Keep reading till the end! We’ve got an amazing bonus waiting for you.

Blockchain Oracles: What Are They (And Why They Matter)?

As aforementioned, blockchain oracle is a service offering external information and data to smart contracts, allowing them not only to extract data from other blockchains but also from the real-time world or off-chain world. Identity verification for government, asset price for finance, weather information for insurance are some blockchain oracle example that profit from establishing oracles with smart contracts.

Why Do Smart Contracts Need Oracle?

As already known, smart contracts are inherently isolated and deterministic, they don’t have the capability to extract data from the external world without an intermediary. Thankfully, oracle catered this as intermediary, bridging the gap between off-chain and on-chain data sources.

Oracles are the bridge between blockchain and the external world. As a result, oracles widen the types of digital contracts that blockchain may facilitate by offering a universal gateway to off-chain resources while ensuring the blockchain’s key security qualities.

Still confused about the blockchain oracle’s role? Let’s understand with a real-world example:

Let’s imagine we have an Ethereum smart contract developed to bet on the price of the gold. Both players submit their bets into the smart contract. But, the question is – “What does a smart contract need to distribute the prize when the period is over.” This is where Oracle blockchain comes into the picture. Oracle acts as the bridge between blockchain and the real world. They can fetch accurate prices off-chain and deliver them to the blockchain securely and reliably.

How Blockchain Oracle Works?

As understood, oracles in blockchain are not the data sources themselves, indeed a software layer (oracle network) that verifies, queries and authenticates external data sources and then transits that information. The transferred data can be in different forms – price information, humidity measured by a sensor or a successful completion of a transaction.

To call data from the outside world, smart contracts are invoked and network resources are spent. Here’s an outline of how oracle blockchain works.

Step 1: Data Request

At first, the user sends a data request.

Each request depends on the nature of the app, but often, it presents the desired data and sources as well as how to process and pile responses into a single value.

Step 2: Data Request is Passed to Oracle Contract

The on-chain oracle contract is the powerhouse that gets data requests, transmits them on to off–chain oracle nodes, and returns data to smart contracts. Everything is managed by a smart contract, eliminating the need of auditing the code to ensure it works as intended.

Step 3:Oracle Contract Creates a Log Event

This is the way an on-chain oracle engages with the off-chain node. The “eth_subscribe” command is the most common strategy used in JSON-RPC to develop a subscription to certain events on the Ethereum network. A similar approach is used in other blockchain networks.

Step 4:Oracle Node Starts the Off-Chain Task

Here, the node dispatches an HTTP GET request (or any other API call method) to third-party services. Once data is retrieved, it’s analyzed and reformatted into a blockchain-compatible format, and then submitted back on-chain through a transaction to the oracle contract.

Everything that happens off-chain as information transfers are not confined by gas expenses, block dimensions, or other on-chain limitations. Furthermore, considering the distinction between data sources and oracles – oracles are not the data source, they are the bridges by which smart contracts access the data.

You may ask – “How can oracles improve the functionality of blockchain development services”?

Oracles Improve Blockchain Functionality in Multiple Ways

Oracle’s bring significant benefits to the table that empower businesses to use the complete potential of blockchain technology.

1.Accessing External Data and APIs:

Oracles play a crucial role in enhancing blockchain technology by enabling it to connect with and retrieve data from external sources, such as web APIs, IoT devices, and off-chain systems. This connection allows blockchains to go beyond their internal data and access real-world information, significantly broadening the potential use cases for smart contracts. By integrating external data, blockchains can power more dynamic and responsive applications, such as decentralized finance (DeFi), supply chain management, and insurance, making them more versatile and effective in real-world scenarios.

2.Scalability and Performance:

Oracles can relieve blockchains of certain computational and processing tasks, enhancing their scalability and performance. By offloading these tasks, blockchains can handle more complex operations and process a higher volume of transactions without sacrificing their core functionality. This optimization enables blockchain networks to support a broader range of applications and maintain efficiency even as demand increases.

3.Improving Smart Contract Capabilities:

Oracles enhance smart contracts by providing them with access to external data, enabling these contracts to make more informed and dynamic decisions based on real-world conditions. This capability significantly expands the potential applications of smart contracts, allowing them to automate processes that depend on external information. As a result, smart contracts can interact with real-world events and systems, opening up new opportunities for automation and efficiency across various industries.

4.Enhancing Security and Reliability:

Oracles play a key role in enhancing blockchain security by implementing measures like cryptographic proofs and validation mechanisms to ensure the integrity and reliability of the data they feed into the blockchain. These security protocols help mitigate the risks of incorrect or malicious data entering the system, strengthening the overall trustworthiness and reliability of the blockchain. By safeguarding the data flow, oracles help maintain a secure and trustworthy environment for decentralized applications and smart contracts.

5.Supporting Interoperability:

Oracles play a pivotal role in bridging the gap between blockchain technology and traditional systems, facilitating the exchange of data and enabling cross-chain transactions. By connecting blockchain networks with external systems, oracles enhance interoperability, allowing blockchain technology to integrate more seamlessly with existing digital infrastructure. This improved connectivity opens up new possibilities for businesses and applications, making it easier to incorporate blockchain solutions into the broader digital ecosystem.

Worth Knowing – Transform Your Business with Simple Blockchain Implementation

Blockchain Oracle Use Cases And Applications

Blockchain Oracles bridge the unmet challenges between on-chain and off-chain worlds by extracting and validating external data for smart contracts.

Use Case 1:Financial Data Retrieval for DeFi Applications

Peer-to-peer lending, asset training and borrowing in DeFi needs real-time financial data, like exchange rates and capital markets data. For example, a DeFi (Decentralized Finance) lending protocol requires present market prices for assets deposited as collateral.

Oracle Examples:

Chainlink: This offers tamper-proof inputs, outputs, and calculations for advanced smart contracts across blockchain.

Brand Protocol: It connects real-world data and APIs to smart contracts.

UMA Oracle: It allows smart contracts to get diverse data for numerous applications.

Use Case 2:Creating Verifiable Randomness for Blockchain Apps

As understood, blockchain-based lotteries or games need unpredictable randomness, a challenge because of the deterministic nature of blockchains.

Oracle Examples:

API3 QRNG and Chainlink VRF provide immutable Random Number Generation (RNG), ensuring fairness and unpredictability.

Use Case 3:Fetching Real-World Event Outcomes

Blockchain oracles allow smart contracts to respond to real-world events. Decentralized insurance apps might leverage oracles to access accurate weather data or disaster reports.

Oracle Examples:

Pyth Network: It publishes real-world financial data on-chain.

Witnet: A decentralized oracle helping smart contracts respond to real-world events.

Use Case 4:Automating Smart Contract Execution

Oracles in blockchain automates functions within a contract to maintain application functionality.

Oracle Example:

Chainlink’s Keeper Network enables smart contracts to outsource maintenance tasks in a decentralized way.

Recommended Read:Explore the Powerful Potential of AI and Blockchain Together

Types Of Oracles in Blockchain

Oracles serve numerous purposes, thus they come in different design and administration patterns.

According to ethereum.org, the most widely-known design pattern is request-response because it enables smart contracts to query specific information instead of a complete dataset. On the contrary, publish-subscribe is beneficial for extracting dynamic changes, i.e fiat-to-crypto exchange rates. Another crucial classification pertains to administration, answering questions like “who controls the oracle: a single entity or several peers”?

Based On Network Administration (Trust Model)

1.DeCentralized Oracles:

The information given to smart contracts by decentralized oracles is more viable than that shared by centralized oracles since it’s not based on a single source of truth. The objective of these oracles are the same as those of public blockchains. Though they strive for a trustless system, they don’t remove trust completely but rather spread it among different people.

a. They address the challenge of a single source of failure in centralized oracles. This means if any one blockchain oracle fails to perform as intended then the smart contract will function as planned.

b. It blends numerous independent oracle node operators and multiple reliable data sources to establish end-to-end decentralization.

2.Centralized Oracles:

This type of oracle can only be accessed by one party and serve as the sole data source for smart contracts. Although, relying on a single data source is perilous since it leaves the smart contracts vulnerable to manipulation.

a. Centralized oracles are vulnerable to a single point of failure.

b. Also, it makes smart contracts more susceptible to exploits and other potential breaches.

3.Inbound Oracles:

These type of oracle carries information from external sources into a blockchain. Inbound oracles can be used to:

a. Access data from several sources, like weather conditions, asset prices and sports scores.

b. Improve the performance of smart contracts by proactively integrating updates into the blockchain.

c. Validate data using real-world devices like thermometers.

4.Outbound Oracles

An outbound oracle is a type of blockchain-based smart contract that sends data from a blockchain to an external system.

5.Hardware Oracles

Hardware oracles are developed to gather data from the real world and make it accessible to smart contracts. These oracles transform physical occurrences into machine-readable values that smart contracts can easily use.

a. Barcode scanners, electronic sensors, and other reading devices are examples of devices used to collect such data.

6.Software Oracles

Software oracles communicate with external data providers and add their findings to the distributed ledger. They also gather data from any online source, consisting of servers and web pages. These oracles can instantly offer the requested data to running smart contracts.

a. Any up-to-the-moment data like currency exchange rates or digital asset cost can be provided.

7.Human Oracles

Individuals with knowledge in a specific sector can act as oracles. They collect information from specific sources, check its legitimacy and transform it into smart contracts. Because human oracles use cryptography to verify their identity, the probability of a fraudster impersonating them and offering them tampered data is minimal.

8.Contract-specific Oracles

These types of blockchain oracles are to comply with smart contracts that are single. If blockchain app developers want to develop numerous smart contracts, it’ll be important to create various contract-specific oracles. These should be utilized only in specific situations.

9.Computation Oracles

Computational oracles are used to perform computations on a set of inputs and return a calculated result that would be daunting to calculate on-chain. For instance, to estimate the yield of a bond contract, a computation oracle can be used to perform a computationally complicated regression calculation.

Based On Oracle Design Patterns

Once data is stored in a smart contract’s storage, other automated agreements can access it through message calls that request the oracle’s smart contract’s “retrieve” function. Also, it can be “called” by Ethereum nodes or network-enabled clients by “looking into” the oracle’s storage.

The three main strategies to set up an oracle can be categorized as follows:

1.Immediate-Read Oracles:

These oracles offer data immediately upon request and are primarily used for data that is static or changes irregularly.

2.Publish-Subscribe Oracles:

These types of oracles constantly update “data feed” for smart contracts to access. And with dynamic data, there is a need to monitor client contracts for alterations.

3.Request-Response Oracles:

These oracles allow smart contracts to demand specific data beyond the scope of publish-subscribe oracles. Plus, they are optimal for scenarios where the entire dataset is extensive for on-chain storage, or users needing only data fragments randomly.

These envelop an on-chain component receiving data requests, subsequently delegated to an off-chain node for processing. The invoking contract must designate funds to offset the gas expenses during the oracle’s response phase.

Finally…

One of the most pressing challenges for the global rollout of blockchain development technology is the creation of a reliable mechanism to facilitate interaction between the outside world and smart contracts. If blockchain oracles weren’t available, smart contracts would be limited to using only data already available within their networks.

Safeguard measures can be built into the blockchain ecosystem with the help of decentralized oracles networks (DON), which might greatly reduce the system’s vulnerability. To ensure the continued growth and success of the blockchain ecosystem, it is crucial that oracles be deployed in a way that is both secure and trustworthy.

As a leading blockchain development company, Apptunix delivers innovative solutions for blockchain oracles and related services, ensuring secure and reliable integrations that strengthen your blockchain ecosystem.