Last updated on July 5, 2022
Oracles are off-chain sensors that can communicate data to and from a blockchain. They enable real-world applications to leverage the convenience and security of blockchain technology. Notably, these systems provide developers with a reliable way to leverage extensive off-chain resources, such as tamper-proof price data, verifiable randomness, external APIs, and more. As such, oracles are considered one of the most important developments in the market at this time.
How Do Oracles Work
Oracles can be set up in endless configurations. However, there are two main classifications for these sensors, centralized and distributed. Centralized oracles are single sensors that provide data to networks. Centralized oracles were the first type of oracles to gain popularity. They were easy to deploy but lacked in many key areas. Their centralized nature led to the emergence of a variety of issues that could create problems down the road for networks.
These early oracles acted like a choke point that created centralization in networks that strived to remain decentralized. As such, developers began to explore how to eliminate these issues while retaining the real-time tracking and system-wide monitoring capabilities of these networks.
Incorrect Data Entry Problems
Remember, once data makes its way onto a blockchain it can be difficult, if not impossible, to change. When a centralized oracle fails or provides faulty data, it can wreak havoc on the network. This issue can create headaches and rupture workflow on private networks. On a public blockchain, with no way to alter data, this information becomes useless congesting the blockchain.
To combat these issues, developers quickly introduced decentralized oracle networks. Decentralized oracles operate as a network of sensors. These systems are far more efficient than centralized versions because they can self-check their data for quality and accuracy. These networks constantly monitor all the data presented from oracles and cross-reference it against past data and current information provided by other sensors.
When the network determines that there is a discrepancy, it can eliminate an oracle from the network completely. The main advantage of these systems is that it prevents any wrong sensor data from making it onto the blockchain.
You also have oracles that send data to-and-from the blockchain. For example, one of the most common uses for oracles is within the DEX (decentralized exchange) market. Here, oracles have replaced the order book for pricing assets. These sensors monitor the market to ensure the price of a digital asset on a DEX is in line with the market value. These systems play a vital role in the DeFi market as most DEXs utilize oracles to monitor asset values currently.
What Problems Do Oracles Attempt to Fix?
Oracles alleviate a lot of problems that have cost developers and businesses millions. For one, they provide a streamlined and secure way to introduce automated smart contracts to normal off-chain transactions. The removal of humans from these equations helps to improve efficiency and reduce errors. Oracles never get tired, need to take a break, or can be bribed. However, they can be corrupted or fail to operate properly. That’s exactly why decentralized oracles are now the status quo in the market. In the end, oracles enable firms to save on fees and other operating costs.
Benefits of Oracles
There are endless benefits that oracles bring to the market. For example, imagine you take a car loan out from your bank. In a traditional scenario, your bank would hold your car note until you paid off your loan balance. Once your loan is paid off, a banker would approve the title transfer of your vehicle. Sadly, this process can take weeks as your bank’s lending officer must personally approve the transaction.
However, the same process could be significantly streamlined using oracles and blockchain technology. For one, once you paid off your loan, an oracle could automatically send a notification to the smart contract holding your title. This notification would demonstrate that you have met the terms of your contract and automatically release your title. Additionally, if this system was coupled with a tokenized ownership protocol, you could receive your ownership token in seconds.
Additionally, oracles can help streamline the earlier processes associated with lending as well. Imagine when you went in to request a loan, an oracle automatically checked your qualifications. This oracle could be set up in a manner to register your credit, funding, and more. This strategy eliminates any human bias and provides the market with a fair and balanced option.
The usability and overall functionality of oracles continue to expand. Developers are finding innovative ways to introduce these sensors into networks to improve efficiency. Imagine an oracle that was set up to monitor the weather in certain regions. If the weather dropped below freezing, the oracle could be set up to sell your tokenized agricultural assets automatically.
Scalability
Another huge advantage oracles introduce to the market is scalability. This benefit stems from the fact that oracles can be used to combine on-chain and off-chain infrastructure. Networks can offload their heavy computations onto side networks to reduce congestion. In turn, developers can more easily create privacy-preserving, high-throughput, and externally connected decentralized applications.
This strategy has proven to be highly effective. Already, there are multi-chain networks that take the computational aspects of the blockchain and remove them from the validation process. This structure is ideal for scaling. It was pioneered by off-chain protocols like the Lightning Network, which was created to help Bitcoin solve some of these congestion issues. Today, oracles enable networks to leverage cloud computing sources as part of their computational strategy. This approach frees up significant resources and helps to drastically reduce the carbon footprint of the mainnet of a protocol.
Blockchain Agnostic
The main benefit provided by oracles is that they are blockchain agnostic, which means that they are not beholden to any blockchain in particular. You can have a network of oracles providing data to multiple blockchain networks simultaneously. This strategy is ideal for the DeFi community as the industry is currently fragmented into different ecosystems. Oracles help to bridge the gap between these networks
There are oracles in operation today that can connect to all leading public and private blockchain environments from a single framework. In turn, these sensors help to promote more cross-chain connectivity which helps to drive liquidity in the market.
Build Better Dapps
Oracles enable developers to build better Dapps. The introduction of oracles into the market significantly expands the usability of blockchain technology. These sensors can be set up to monitor nearly anything. There are oracles in place today that monitor the price of cryptocurrencies, the weather, stock prices, and even social media traffic. Developers can leverage these inputs to provide a new user experience to the market.
Connect Systems
In order for blockchain technology to become a mainstream technology, it needs to possess some form of interoperability with other systems in place today. Oracles are ideal for this task. They provide a streamlined way for the decentralized Web 3.0 ecosystem to access existing data sources, legacy systems, and much more. Consequently, the introduction of oracles to the market has driven innovation.
Enterprise clientele remain fully invested in the legacy systems. They can continue to use these systems in addition to blockchain protocols without the need to relearn entire new business processes. This strategy assists in onboarding and makes blockchain a more viable option for enterprise clientele.
The Evolution of Oracles
The concept of oracles has been around for years but it wasn’t until recently that the emergence of oracle blockchains changed everything. Networks such as Chainlink provide Dapp developers and blockchain enthusiasts with a powerful way to stay in touch with outside factors. Early oracles were focused on monitoring cryptocurrency prices across popular CEXs (centralized exchanges). This use was required for DEXs to maintain the proper pricing of assets without the use of an order book.
Eventually, developers realized that oracles could serve near-endless purposes in the market. This is when the concept took flight. People began to make oracles that would monitor anything from stocks and commodities to the weather and even sports scores. Today there are Oracle-based sports betting platforms that operate completely autonomously.
These systems enable users to enter into smart contract wagers. The protocol registers the wager and monitors the game until the final score is released. The oracle monitors this score and then releases your winnings. These systems are ideal for this setup because there is no delay. Also, it reduces the risk of theft or human error. In the end, all parties gain significant benefits.
Decentralized Oracle Networks
There are a variety of blockchain networks leveraging decentralized oracles at this time. Some of these systems use decentralized oracles as part of a larger logistics system. Other systems were built to provide this infrastructure to businesses and other blockchain protocols. Here are some of the decentralized oracle networks currently making waves in the market.
Chainlink
Chainlink was an early entry into the Oracle race. The protocol first entered service in 2014. At that time, it was referred to as SmartContract.com. Within a year, the protocol changed to Chainlink to put it in line with a larger marketing push and planned ICO (initial Coin Offering). In 2017, Chainlink raised eyebrows when it secured $32 million in funding to expand operations. In 2019, the firm inked a partnership deal with Google to assist in Google’s smart contract strategy.
Band Protocol
The Band Protocol entered the market in 2018 and is considered Chainlink’s main competitor. The protocol took a slightly different approach than Chainlink with the introduction of community-curated data sources. This strategy gives Dapp operators more control over the data validation process. They can curate data to ensure quality and recommend these data streams to the community.
The Band Protocol operates as a cross-chain oracle network that empowers dapp developers to build more immersive titles. The network makes it easy for developers to integrate price and event feeds into their creations. This strategy has led to more responsive Dapps that can communicate data across multiple blockchains.
Witnet
Witnet takes a unique approach to the oracle solution. The network integrates a reputation system to help improve data streams. Users receive a score based on their oracle’s performance. The system incentivizes oracles to provide their service to the community. The network is set up to punish oracles and remove those that can’t meet the demands of the community.
Witnet’s reputation system is a great way to ensure that only the best and most accurate oracles get to provide data to the blockchain and Dapps. This added security is ideal for Dapps that require an exact data stream that processes in near real-time such as DEXs. In the Witnet protocol, these oracles are called witnesses. They receive rewards for their efforts.
The network enables developers to search through data streams via a marketplace to find the one that meets their particular needs. This approach is great because it provides Dapp developers with more flexibility. They can go through the options until they discover the oracle that meets their needs. They can even gather multiple oracles and use them to verify each other or other complex scenarios in real time.
Oracles are Here to Stay
Today, oracles are in use across the entire blockchain sector. These sensors are a vital component of the blockchain market. The introduction of decentralized oracles has helped to improve these systems’ accuracy and responsiveness considerably. The use of oracles is now common in the market and you can expect to see more developers seek to integrate this game-changing technology into the market moving forward. For these reasons, you can expect oracles to play a crucial role in some of the top blockchain Dapps for the foreseeable future.