Crypto Oracles Explained : How Crypto Oracles Connect Blockchains to the Real World

Crypto oracles serves as a medium between the outside world and blockchain. Blockchain cannot collect data on its own; therefore, the computer program on blockchain, known as smart contract, performs its action when the oracles provide the required information. 

Chainlink, Band protocol, API3, Pyth Network are a few crypto oracle that brings the real-world information on weather, prices, and events to the blockchain smart contracts. This article discusses various aspects of crypto oracles, including their types, functioning, benefits, challenges, risks, and their future. 

What Are Crypto Oracles?

Crypto oracles act as a bridge that brings real-world information into the blockchain. Oracles collect information from various external sources and verify the accuracy of the news on their own. 

Crypto oracles can transform the information into a format that can be decoded by the blockchain. The data is then sent to smart contracts. After receiving the data, the smart contracts perform actions based on pre-set conditions. 

The smart contracts cannot access data on their own since they are detached from the outside world due to security issues. Blockchains are like isolated databases; they only know what has been entered onto their chain. 

Types of Crypto Oracles

Various types of crypto oracles include, 

• Software oracles get the information from the internet. They can collect data from websites, servers, etc.
• Hardware oracles collect data from the physical devices in the real world. They collect information from electronic sensors, barcode scanners, and other reading devices.
• Inbound oracles bring information to the blockchain from the outside world. Inbound oracles give the information from the blockchain to the outside. 
• Human oracles are real people who are chosen for their expertise and trustworthiness. They verify and send the data to the blockchain. 
• Contract-specific oracles are created for one specific smart contract only. They are not used generally across blockchain.
• Cross-chain oracles transfer data between blockchains. They aid the communication between the blockchains.
• Compute-enabled oracles process, analyze, and verify the information collected before sending it to the blockchain. This helps smart contracts use more accurate and reliable information. 
• Consensus-based oracles depend on multiple oracles that give the same information. The blockchain only accepts the data that has been agreed upon by most of the oracles. 

How Crypto Oracles Work

• Smart contract requests data, as it cannot fetch the data on its own.
• Oracle collects the data from external sources, including websites, APIs, sensors, humans, etc
• Oracle checks for the accuracy and verifies the data collected. 
• Oracles convert the data into a format that can be decoded by the blockchain. 
• The verified and formatted data is sent to the smart contract. 
• Based on the data, the smart contract executes the pre-set rule. 

Use Cases of Crypto Oracles

• DeFi price feeds: Oracles bring real-time prices of crypto, stocks, commodities, etc
• Insurance payouts: Oracles bring real-world data like weather, rainfall, or flight delays
• Supply chain tracking: oracles track the movement and condition of goods using sensors.
• Sports and event results: oracles gives verified sports scores, election results, and event outcomes for betting apps, prediction markets, etc.
• Real-world identity and KYC data: oracles give information regarding the user to ensure security and compliance needs.
• Cross-chain communication: oracles allow blockchains to communicate with each other.
• Automated payments: oracles trigger payments when real-world conditions are met.

Benefits of Crypto Oracles

• Crypto oracles serve as a barrier for the communication between the smart contract and the outside world. 
• Manual work is reduced since the data are sent automatically.
• Increases blockchain utility and unlocks new use cases.
• Oracles collect information from various sources, which prevents manipulation and reduces mistakes. 
• Reduce fraud and errors since the data is verified and automated.

Challenges and Risks

• If the centralized oracles that depend on a single source of data are not functioning properly, it puts the users’ funds at risk.
• The information collected by the oracle from the external source is manipulated by someone, which may lead to the sending of false information.
• Hackers can attack the oracles or the websites from which they fetch information. They can also make changes to the information. 
• Slow or delayed data can cause huge losses in a fast-paced environment. 
• Some advanced oracles require multiple data sources, verification, and computation, which increases the cost for users and developers. 

The Future of Crypto Oracles

The future of crypto oracles looks strong because the blockchain needs more real-world data to run smart contracts. As DeFi, NFTs, and blockchain apps grow exponentially, the role played by the oracles to collect accurate information also becomes significant.

Oracles are moving from being basic data providers to smarter systems that provide verified and secure information. More decentralized oracle network emerges, which reduces the risks of hacks and data mistakes. They also help different blockchains to communicate with each other.

Conclusion

Blockchains and smart contracts are incapable of extracting data from the external world on their own. Oracle plays a crucial role in providing the blockchain with reputable and trustworthy data. 

Oracles are important because they enable smart contracts to make decisions based on real-world data. Blockchain can access information on weather conditions, market prices, or data from Internet of Things(IoT) sensors through oracles. 

Oracles can also collect incorrect information. This happens when it is centralized, in which an oracle depends on only one source to gather information, but, decentralized oracle is more reliable than a centralized one since the information is gathered from various sources.

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