Blockchain oracles serve as intermediaries connecting blockchains with external systems, enabling decentralized applications (DApps) to retrieve off-chain data and trigger actions based on real-world events.

In essence, blockchain oracles facilitate the integration of external data into on-chain smart contracts. This data may encompass various sources such as weather data, random number generation, price feeds, event outcomes, web APIs, enterprise databases, and more.

Devoid of oracles, blockchains and smart contracts would remain isolated from external events and data. For instance, decentralized exchanges would struggle to determine fair asset prices without access to centralized finance price feeds, illustrating the necessity of blockchain oracles.

Oracles fundamentally address a significant constraint of smart contracts: their incapacity to directly interact with external systems. By furnishing data to on-chain applications or facilitating cross-chain data transmission, oracles substantially broaden the functionality and potential use cases of blockchain technology.

What is an Oracle network?

While an individual oracle can provide data to smart contracts, oracle networks take this concept further. An oracle network brings together multiple independent oracle nodes, consolidating their data to grant smart contracts access to off-chain computation and data.

Oracle networks facilitate end-to-end decentralization in data delivery by amalgamating various data sources, multiple oracle operators, and advanced aggregation technology. This aims to eliminate any single point of failure and enables smart contracts to utilize real-world data in their operations.

How do blockchain oracles work?

Oracles operate through a series of steps involving fetching, validating, and broadcasting data from external sources to on-chain smart contracts. The essential steps typically include:

1. Smart contract initiates an oracle request
2. Oracle nodes monitor the blockchain for requests
3. Oracle nodes retrieve data from off-chain sources
4. Nodes aggregate data to produce a unified result
5. The final result is signed and transmitted on-chain
6. Smart contract utilizes the result and executes its logic

For instance, consider a decentralized finance (DeFi) lending platform's smart contract creating a request for the price feed of a specific asset. Oracle nodes would detect this request, gather price data from exchanges, aggregate it into a single price, sign the data, and relay the result to the smart contract. Subsequently, the DeFi platform would utilize this price data to compute interest rates or liquidation penalties.

This process enables smart contracts to integrate real-time data into their operations while retaining the advantages of blockchain networks.

Types of blockchain oracles

There are several types of oracles, each offering distinct data and services to blockchain networks:

Input oracles: These oracles retrieve and deliver data to smart contracts from external sources such as web APIs, enterprise systems, IoT devices, and more.
Output oracles: Output oracles enable smart contracts to execute actions on external systems, such as making payments or storing data.
Compute oracles: Compute oracles conduct intensive off-chain computations, such as generating randomness or executing machine learning models.
Cross-chain oracles: Cross-chain oracles fetch data from different blockchain networks, facilitating interoperability between these networks.

These various types of oracles significantly expand the potential use cases for smart contract developers. For instance, input oracles, such as price feeds, are crucial for decentralized finance (DeFi) applications. Compute oracles enable the implementation of verifiable randomness in blockchain gaming. Cross-chain oracles facilitate the movement of assets across different blockchain networks, while output oracles can trigger real-world payment transactions.

Together, these oracles provide the external connectivity required for hybrid smart contracts to respond to real-world events and interact with traditional infrastructure.