How Oracles Connect Blockchains to the World Outside

Introduction

Blockchain technology is a wonderful revolution of the modern era. Yet it has some limitations that make it dependent to other services. Without these services, it has limited functionality. Imagine a safe in a closed room, and it needs to open and shut only when certain conditions are met. The conditions include the condition of weather outside, the winner of the US presidential elections, the completion of certain transaction, etc. However, the safe in the closed room is unable to gather the outside information on its own. It needs a messenger that brings information from the outside world.

What are Oracles?

A blockchain oracle is a trusted data service that carries information to and from the smart contract of the blockchain and connects them to the real world. You can understand an oracle as a bridge between the blockchain and the outside world. Blockchain technology has many uses other than DeFi. Scientists, farmers, and estate planners have started using the technology lately. In such cases, it is imperative for smart contracts to be aware of variegated information, which can only be brought by oracles.

How Oracles Gather External Data

Going back to the analog of the safe in a closed room, we think of an oracle is a messenger that goes out and brings information for the safe to open or remain closed. As messengers, oracles collect information from various resources. These resources include online data like websites, blogs, vlogs or public databases. Oracles also retrieve a lot of information from physical sensors such as weather sensors, GPS trackers, IoT temperature sensors, motion and vibration sensors, etc.

Types of Oracles

Depending on the type and mode of information they gather, oracles can be categorized into different types.

1. Inbound and Outbound Oracles

One group of oracles brings information from the outside world into the blockchain. The other group takes information from the blockchain to the outside world. The example is of the former type is the oracles that tells the smart contract about the weather condition, winner of a competition, etc. Chainlink, Band Protocol and API3 Airnode are a few prominent inbound oracles.

On the other hand, outbound oracles collect the information from the blockchain and take it somewhere else. It could send signals to a smart lock to open after the payment process has been confirmed on chain. In simple words, inbounds oracles make blockchains react to an external piece of information whereas outbound oracles enables blockchains to influence the external world. iExec Oracle Factory and Zapier–Ethereum integration are the examples of outbound oracles.

2. Centralized Vs Decentralized Oracles

A centralized oracle is just like a messenger that collects information from a single source. On the contrary, a decentralized oracle collects information from various sources and tallies it before relaying it to the blockchain. Centralized oracles are usually faster and cheaper. They are easy to manage for the service provider. However, if the server is offline, or the data is manipulated, the single point of failure affects the transparency and efficiency of the blockchain. MakerDAO Medianizer and CoinMarketCap API Oracle are major centralized oracles.

Greater reliability and enhanced trust make decentralized oracles a far better option. Information retrieval from various independent resources is a preferable choice for anyone in any situation. The risks of manipulation, downtime, or error or swept out of the way. By using consensus among several oracle nodes, it ensures that the information delivered to smart contracts is accurate and tamper resistant.

3. Software and Hardware Oracles

Software oracles fetch information that is already present on the online sources in digital form. For example, they may get information like stock prices, sports or election results, flight delays, etc. Chainlink, Pyth and Tellor are prime examples of Software oracles.

Hardware oracles collect data from physical devices or objects. They get in touch with devices and sensors that measure real-world conditions such as temperature, motion, location, or humidity and then send the readings to the blockchain. Notable examples are Ambrosus, OriginTrail and Modum.

4. Contract-Specific Oracles and Human Oracles

There are a few projects that have their own oracle services. They have very low and very efficient response time. However, being in-tune with a single smart contract, the single point of failure can be a major hurdle.

Human oracles come into play when flexibility and contextual judgement are required. When truth requires interpretation or verification that sensors and automated feeds cannot provide, human capabilities work better. However, prejudice, subjectivity and bribery are the major risks involved in using human oracles. Kleros jurors and Reality.eth are notable examples of human oracles.

The Oracle Problem: Trust in the Messenger

Since the oracle and its operation is outside the blockchain consensus mechanism, its working is not as safe and transparent as that of blockchain’s. And, if blockchain it to execute its operation on the basis of data fetched by its oracles, the level of authenticity is to something to be monitored. Manipulation of data is something very common in the world of blockchain technology and the crypto market. This is the oracle problem: blockchain’s decentralization, transparency and fairness becomes questionable if it is reacting to manipulated information.

Mitigating Oracle Risks

Certain safeguards and thoughtful designs can help get away with the consequences of risks associated with oracle problem. Decentralized oracles are the first and most reliable solution as they collect data from multiple independent sources. When various nodes confirm the same piece of information, the chances of manipulation or error are minimized. Cryptographic proofs are another method that ensures data integrity. These proofs verify that the data received from the oracle has not been tampered with during transmission.

Moreover, reputation systems reward oracles with a consistent record of accuracy and penalize those that deliver false data. Finally, smart contract developers can design systems where multiple oracles cross-check one another. This way, even if one source fails or gets corrupted, the others can maintain the overall accuracy and trustworthiness of the blockchain operation.

Bottom Line

Oracles are the bridges that connect close-circuit networks like blockchains with the world outside. There are many kinds of oracles, each of which has advantages as well as disadvantages. Regardless of their type, manipulation of data is a common reservation. But advancement in oracles’ working and improvement in the usage helps mitigate the risks.