A Comprehensive Guide to Blockchain Oracles

  • Crypto Guru
    August 30, 2022, 18:36

Anyone with even the slightest interest in crypto and blockchain technology is almost certain to have come across mentions of blockchain oracles before. These third-party services are essential to the existence of smart contracts. As such, they are crucially important within the world of the blockchain.

But what are they? And why are they so important? What are the different types of blockchain oracles and are there any problems associated with their usage? This article sets out to answer all these questions.

Blockchain Oracle Definition

A blockchain oracle is an intermediary service that allows a blockchain ecosystem to connect to the outside world, meaning oracles are necessary for the operation of smart contracts. This is because blockchains exist within a closed system and cannot access this information themselves.

There are two main types of oracle. The hardware oracle, which collects data from the physical world (e.g. from thermometers, sensors, barcode scanners, etc.), and the software oracle, which instead gathers information from various online sources.

What are Blockchain Oracles Used For?

To understand the important use of blockchain oracles, it’s worth briefly explaining what a smart contract is. Simply put, a smart contract is a type of self-executing program stored on a blockchain that activates once the conditions laid out in an existing contract have been met.

Oracles make this happen. As explained above, blockchain oracles are intermediaries between the blockchain and the real world, gathering, authenticating, and passing on relevant data to the network. This means that they provide the necessary data for smart contracts to self-execute. Without the information given by the oracle, blockchain contracts would be useless.

What are the Different Kinds of Crypto Oracle?

We’ve already mentioned that blockchain oracles can be broadly split into hardware and software oracles. But there are even more types of crypto oracles out there. This section describes a few of the most commonly encountered kinds:

Input Oracles. Input oracles are the most well-known type of blockchain oracle today. They gather data from the physical world and transfer it onto a blockchain where it is then consumed by smart contracts.

Output Oracles. As the name suggests, these oracles function in the opposite way to input oracles. These are used to send data from smart contracts to systems located off the blockchain.

Cross-Chain Oracles. These oracles interpret and transmit data across multiple blockchains. Such oracles can be used to transfer assets as well as information.

Compute-Enabled Oracles. Compute-enabled oracles are relatively new on the scene. These oracles make use of off-chain computers to carry out certain services that cannot practically be carried out on a blockchain, whether because of legal, technical, or monetary restrictions.

The Problem with Blockchain Oracles

While blockchain oracles do serve a necessary and important function, they are not without their problems—the main one being that oracles can occasionally be compromised. Since they are not part of the blockchain itself, they do not benefit from the stringent security mechanisms often provided by these networks. This leaves oracles open to hacking attacks.

Unfortunately, if the security of an oracle is compromised, then so is the smart contract that relies upon it. Man-in-the-middle attacks and other forms of hacking are therefore a noteworthy concern.

Conclusion

The importance of blockchain oracles to the Web3 ecosystem cannot be overstated. They are not without their risks, of course, but with the proper moderation and sensible precautions, they can be used to great effect.

If you’re curious about getting involved directly with blockchain oracle tech, look no further than Grapherex. Our clients can set up their own oracle nodes within a network, representing an exciting opportunity for those interested in this aspect of the crypto sphere.