Any ecosystem has several components, and if one of them is missing, then it will not be able to work normally. This also applies to blockchain. He needs a connection with data sources and the outside world. This is the role played by oracles.
Oracle on the blockchain, what is it for
We can say that an oracle in the blockchain is a conductor, a translator, connecting the source of information from the external environment and the blockchain itself. The oracle is engaged in receiving information from various sources, they are engaged in converting them into a language that will be accepted by smart contracts. They, in turn, are engaged in processing operations on the blockchain.
What are blockchain oracles for?
Without the oracle, blockchain and smart contracts are unable to access information from the external environment, since such a function is not contained in them. The scope of use of smart contracts is expanding significantly through the use of oracles, since they are able to interact with information outside the blockchain itself.
It should be remembered that oracles are not sources of information, as users sometimes assume. They are only intermediaries, requesting, verifying, authenticating readings from the external environment, and then transmitting them. As for the information they can transmit, it can be price data, notification that a payment has been completed, an indicator of the health of the system, and so on. The functionality of oracles depends on what kind they are.
Program. It interacts with an online source of information and then transfers it to the blockchain. Data can come from a server, a website, from all types of data sources that are on the Internet. Since the software oracle is connected to the Internet, it can not only transfer data for a smart contract, but also broadcast it online.
Such an oracle is considered the most widespread of all. Most often, the software oracle uses clusters of information from trading floors, financial markets.
Some types of smart contracts must necessarily interact with the real external environment. A hardware oracle is used for this. He receives data from the outside world, then forwards it to a smart contract. In fact, such an oracle is engaged in “translating” real events into digital values so that they can be read by a smart contract.
Inbound and outbound oracle
The incoming oracle collects data from various external sources, and then transfers it to the smart contract. The outgoing oracle has a different principle of action. It forwards information from a smart contract to an external source.
Centralized and Decentralized Oracle
A centralized oracle has only one owner – an individual or legal entity. It also acts as the sole data provider for the smart contract. This is also its main risk – if only one data source is used, then the smart contract may malfunction. In addition, if a third party with illegal intentions intervenes, he will be able to change the smart contract for his own purposes. Such an oracle is highly vulnerable to attack.
A decentralized oracle has a higher degree of protection, it does not have a single source of information. It provides data to the smart contract from different data sources. Therefore, the information from him is more reliable. In addition, the decentralized oracle is used in the forecasting market where different data sources need to be provided.
This type of oracle is only used to be used in one smart contract. If a user suddenly decides it is necessary to create a certain number of smart contracts, he will have to develop the same number of such oracles. It should be said that such an oracle is extremely complex and only large companies can serve it. On the other hand, it is more flexible and can be customized to a specific smart contract.
Can a user be an oracle?
Yes, this is possible. In some cases, a specialist can become an oracle. It examines, verifies the authenticity of data from different sources and then translates the processed information into smart contracts. Such specialists confirm their identities with the help of cryptographic signatures; therefore, there are almost no scammers in this environment.
In conclusion, we can say that without oracles, the functioning of modern blockchains is impossible. They act as conductors between the external environment and smart contracts. Each type of oracle has its own functionality that allows them to effectively solve the assigned tasks from users.