What Is a Blockchain Oracle, and How Does It Work?
A blockchain oracle is a form of technology that facilitates a connection between blockchain and external data sources. It is a software program that provides information to smart contracts on blockchains by introducing data from external sources, such as the real world. It is important to note that recorded transactions on a blockchain don’t have a concept of time, nor do any of the related smart contracts. As such, a blockchain oracle is what brings this external data to the blockchain, allowing smart contracts to interact with the real world.
In this article, we’ll explain what blockchain oracles are and how they work. We will also discuss the different types of oracles and the benefits of using blockchain oracles.
What Is a Blockchain Oracle?
A blockchain oracle is an essential part of the blockchain technology that enables a connection between the real world and a blockchain-powered application. It is a line of communication between a blockchain and an external data source, such as an API or a real-world event. A blockchain oracle “listens” to events that happen outside the blockchain and brings that data to the blockchain to be used in various smart contracts and decentralized applications (DApps).
Blockchain oracles are increasingly being used in various industries and application scenarios. By connecting a smart contract to external data feeds, blockchain oracles allow smart contracts to interact with the real world and make decisions or trigger other activities.
How Do Blockchains Use Oracles?
Blockchains use oracles to facilitate a connection between the blockchain and external data sources. Since blockchains don’t have a concept of time, oracles help by bringing in external data such as the current time, the temperature, the price of a currency, or the results of an election. This data can then be read by a smart contract to trigger an action or even multiple actions.
For example, a decentralized application can be set up to automatically buy a certain asset when the market value of that asset falls below a certain limit. Since blockchains don’t register time, a blockchain oracle would be used to provide external data such as the current market value of the asset to the smart contract. Once the smart contract detects the market value has dropped below the limit, it will then trigger the purchase order.
Types of Blockchain Oracles
There are several different types of blockchain oracles, each with its own advantages and use cases. The most common types of blockchain oracles include:
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Software Oracles: These are computer programs that are designed to collect external data such as price feeds, weather data, or other real-world events and “feed” it to smart contracts.
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Hardware Oracles: Hardware oracles are physical sensor devices that use sensors to detect changes in the physical world. They detect various real-world events such as temperature, movement, or pressure and communicate this data to a smart contract.
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Inline Oracles: These are oracles that are embedded within a smart contract. Rather than relying on an external source to provide data, an inline oracle can be used to provide data directly from within the smart contract.
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Hybrid Oracles: Hybrid oracles are a combination of different types of oracles, such as software, hardware, and inline oracles.
Benefits of Using Blockchain Oracles
Blockchain oracles are increasingly being used in numerous use cases and industries, including financial services, healthcare, government, and more. A few key benefits of using blockchain oracles include:
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Automation: By automating data feed, blockchain oracles help to reduce manual processes and human errors. This helps to increase efficiency and accuracy, leading to faster and more reliable transactions.
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Trust: Since blockchain oracles retrieve data from reliable sources, they can be used to verify the integrity of the data being used in any transaction. This helps to reduce fraud and data manipulation.
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Transparency: By introducing real-world data to a blockchain, blockchain oracles enable transparent and secure transactions on the blockchain.
A blockchain oracle is an essential tool in the blockchain technology that allows a connection between a blockchain and an external data source. It is a piece of software that helps smart contracts to interact with the real world by bringing in external data. There are various types of oracles available, such as software, hardware, inline and hybrid oracles. Blockchain oracles are increasingly being used in various industries and applications, offering benefits such as automation, trust, and transparency.
