Smart contracts operating on blockchains hold the potential to revolutionize businesses globally through the creation of Dapps, DAOs, and DeFi applications. But, to ensure a conducive infrastructure for all such futuristic developments, smart contracts need access to real-world data. Now, here is a glitch- the consensus protocols of blockchains deny access to off-chain or external data which reduces smart contracts to mere tokenization tools. In other words, the inability to receive real-world information prevents smart contracts to proactively contribute to a massive number of practical use-cases. And this is where blockchain oracles come up as the savior.
How do oracles help smart contracts and blockchain platforms?
Well, oracles can be defined as 3rd party services which help to bridge the gap between smart contracts & blockchain and the external world which otherwise exists due to blockchain’s consensus protocols. Put simply,
these oracles derive information from the off-chain or external world and feed them into smart contracts so that they can create a suitable infrastructure for developing Dapps, DAOs, and DeFi applications. More precisely, the blockchain oracles are meant to widen the scope of practical functionality of smart contracts and blockchain. The real-world information that’s injected by oracles could range from price information to data about payment completion and so on.
It’s to note here some oracles can even send information from smart contracts to external sources.
Types of oracles
Blockchain oracles can be divided into several types based on 3 major parameters- the source of data, the direction of data relayed, and trust.
Oracles based on source
In regard to the parameter of source, oracles can be of two types- software oracles and hardware oracles.
Software oracles are the ones that derive and relay data from online information sources, ranging from websites, servers, virtual databases, and so on.
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On the other hand, the hardware counterpart services data from the physical world and relays them via barcode scanners, electronic sensors, or other forms of data reading devices.
Oracles based on the direction of data relayed
In this regard, oracles are divided into inbound oracles and outbound oracles. The first one transmits data from off-chain sources into blockchain smart contracts. The second one does just the opposite- it relays data from blockchain smart contracts into the external world.
Oracles based on trust
Based on trust, blockchain oracles can be centralized and decentralized. The centralized option banks on just one single data source and the whole system is governed by one sole entity. It’s a slightly risky business since here everything is monopolized which makes the oracle system vulnerable to manipulation and attacks.
But, a decentralized oracle system is devoid of the above-mentioned risks as here there is no one single authority to govern the oracle system. A decentralized oracle infrastructure derives data from various sources which offers the opportunity to compare and authenticate data before injecting the information into smart contracts.
Sydney Ifergan is a crypto expert and Advisor for the Digibyte Foundation.