Blockchain oracles are an essential source for blockchain users. They aim to extinguish the limitation of smart contracts only being able to access the data contained inside their native network, which is called on-chain data.
Oracles can also be a bridge between the “real world” and the blockchain, where they translate the off-chain data into digital values that can be recognized by smart contracts in real-time. Not only do they serve as a bridge, but they also verify and authenticate the data being provided.
Types of Blockchain Oracles
- Hardware oracles: Interact with physical devices, as the name suggests, providing real-world data to the blockchain.
- Software oracles: Provide data from online systems, like web APIs. Today, it’s the most used type, because it brings information like real-time market price data from assets, economic information, or even weather data!
- Consensus oracles: They collect data from other decentralized oracles to verify the accuracy of the information.
The Oracle Problem
The Oracle problem was largely discussed in the past before decentralized oracles were introduced.
Without decentralized oracles, the off-chain data was provided by centralized players, which could influence the decision of a smart contract executing an action or not, giving too much power to centralized users.
Decentralized blockchain oracles have incentives to provide information, and also punishments if they act maliciously, an action called slashing.
Because of that and also consensus oracles, decentralized oracles were able to dominate the market and made blockchain reach another level of decentralization and usability.
- Chainlink: A decentralized oracle network. The token LINK is used to pay the network contributors. Chainlink is the main oracle network in the market, being supported by all top blockchains, strongly dominating its competitors.
- Band protocol: Very similar to Chainlink, but it operates mainly on the Cosmos blockchain.
- Pyth: A decentralized oracle network that focuses on financial market data, with the goal of providing real-time market data to every blockchain in the world. Today, it is mostly used on the Solana blockchain.
- API3: First-party decentralized oracles that allow smart contracts to interact with web APIs in real-time, getting the latest off-chain data with great connection.
Understanding the importance of oracles is essential to dive deep into the blockchain ecosystem and crypto market. Without oracles, it’s impossible to create good applications that interact with other blockchains and the real world!
Liked the Article?
Blockchain Guide - What is it, how does it work and how it can be used
This article will help you understand the basics of blockchain technology, being a starter guide for everyone that wishes to enter the crypto universe.
DeFi Trading - Decentralized Exchanges (DEXs)
Decentralized Exchanges are marketplaces built inside blockchains where traders can trade their assets without intermediaries. Understand how DEXs work and see if they are a good option for you.
Understanding Smart Contracts
It's impossible to talk about decentralization in the blockchain environment without understanding the concept of Smart Contracts. Learn how these contracts work and why they're so important for the operation of the ecosystem.