Blockchain oracles are an important part of blockchain technology and the key to redefining how blockchain meets user needs.
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What is a blockchain oracle?
A blockchain oracle is a device or entity that connects a deterministic blockchain with off-chain data (data outside the network). Blockchain oracles are essentially third-party services that provide external information to smart contracts.
A blockchain oracle is a bridge between the blockchain and the outside world.They enable smart contracts on the blockchain to access off-chain data. A blockchain oracle can be thought of as a blockchain layer forQuery, verify and validate the blockchainexternal data source. Often, trusted APIs carry out the process, bringing the blockchain closer to real-world events.
Since blockchain applications require means of contractual agreements and other critical information, there must often be relevant information from the outside world in order to enforce the relevant agreements, and this is where blockchain oracles come into play.
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Why are blockchain oracles so important?
Oracle
OracleBroaden the scope of operation of smart contracts. Blockchain oracle technology feeds real-world data into smart contracts, and some oracles can not only pass information to smart contracts, but also send it back to external sources.
With more data available, smart contracts can be used for a wider range of use cases. Without blockchain oracles, smart contracts would be of very limited use, since they can only access data within their network, which is usually restricted to one area (e.g. financial transactions on a cryptocurrency exchange).
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What is the oracle problem?
The challenge of designing a blockchain oracle is that if the oracle is compromised, the smart contracts that depend on it may also be compromised by default, which is the oracle problem.The blockchain oracle problem centers on the problem of trust.
This trust includes skepticism about reliable data transfer from data sources to oracles, reliable code execution in oracles, and reliable data transfer from oracles to the blockchain.
The main problem is that people dont trust these external sources of information in the first place, whether it comes directly from a website or a sensor.
Since oracles are third-party services that are not part of the blockchain consensus mechanism, they are not subject to the underlying security mechanisms provided by this public infrastructure. This makes it difficult to verify the data collected by oracles. Additionally, depending on the type of blockchain oracle, the likelihood of malfunction and intentional tampering increases.
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Types of Blockchain Oracles
Blockchain oracles can be divided into different types based on the following factors:
Source: The source of the data, is it hardware or software?
Information direction: data outbound or inbound?
Trust: Does the data come from a decentralized or centralized solution?
The types of oracles that exist include:
software oracle
hardware oracle
inbound oracle
outbound oracle
Consensus-based oracles
Software oracle processing fromInformational data for online resources, such as temperature, prices of goods and goods, flight or train delays, etc. A software oracle extracts the required information and pushes it into the smart contract.
Smart contracts that require information from the physical world rely on hardware oracles.For example, a car goes over an obstacle, a motion sensor has to detect the vehicle and send the data to a smart contract or a sensor in the supply chain industry.
Inbound oracles provide data from the outside world.They use external sources to transfer data to smart contracts. Inbound oracles also allow data about real-world events to be called to the blockchain. They can be used for automated trading.
Outbound oracles provide smart contracts with the ability to send data to the outside world.A real world example would be a smart lock in the physical world that receives funds deposited to an address. The smart contract sends information about this event to the mechanism that unlocks the smart lock via an outbound oracle.
Consensus-based oracles draw data from human consensus and prediction markets.secondary title
Blockchain Oracles in Practice
Through the lens of existing blockchain oracle project teams, we can better understand how blockchain oracles work in practice. Fuqiu Technology uses UMA, Chainlink and Band three oracle machines as examples in this article.
UMA
The UMA blockchain protocol is an Ethereum-based protocol that enables people to create synthetic assets on the blockchain. UMAs mission statement is to make financial exposure possible to anyone in the world. In order to efficiently trade synthetic assets using up-to-date data, UMA relies on its blockchain oracles.
UMAs oracle system consists of an optimistic oracle and a data verification mechanism. Smart contracts in the UMA protocol request price information from optimistic oracles.
Before the price proposed by the oracle is confirmed, they may be disputed. A request may be sent to the DVM to resolve disputes regarding pricing information. In the event of a dispute, UMA token holders are advised to vote to report the price of the asset with a specific timestamp.
Chainlink
Chainlink is one of the pioneers in the blockchain oracle space, an Ethereum-based protocol that uses a decentralized network of oracles to connect smart contracts with data. One of its most popular products is its price aggregation service, which uses nodes to provide off-chain data to blockchain smart contracts.
Multiple independent oracle operators use Chainlink to update price information. Users of price feed data contribute to its quality with their funds, and oracle operators in the network will receive funds for publishing price data.
The selection of nodes in the Chainlink oracle is based on the reputation and previous performance of the nodes, which helps to maintain high data quality while maintaining the security of smart contracts.
Band
Band Protocol is an oracle network running on the Cosmos blockchain. It is used by decentralized finance applications. In addition to serving decentralized finance applications, Band is also working on new advances in sports, weather, esports data, and random number generation.
Band is popular for its cross-chain oracle solution that pulls data from a web-based API. Band uses trusted data from multiple independent parties that interact using a delegated proof-of-stake consensus.
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New Solutions and New Challenges for Blockchain Oracles
Blockchain oracles are a fairly reliable mechanism for facilitating communication between smart contracts.
For blockchains to maintain sustainable impact across practical applications and across industries, they need to interface accurately with real-world data.
Now that blockchain oracles have made significant progress, future connections between blockchains and external data feeds will represent a major leap forward for the technology.
Blockchain oracles remain one of the many key building blocks in the blockchain ecosystem implemented in a reliable, trustless and growth-encouraging manner.
