In a decentralised world where all data are always limited to a closed blockchain network ecosystem, some situations require data sourced from external sources. Oracle is a piece of tech used precisely for this use case. Oracle is a tool used by smart contracts to establish communication with data from external sources. It is used to source, analyse and verify data from external sources and help in sending data from inside a blockchain ecosystem to external sources.
Oracles are not inherently present in any blockchain and are a standalone third-party tool that can be used by any blockchain to source data required from external sources. This is a key piece of tech that is often undervalued and misunderstood by almost everyone. This is due to the similarities that exist between an Oracle and an API. Both are tools that help a smart contract in sourcing and handling data, but APIs purely focus on on-chain data while Oracles are focused towards sourcing off-chain data.
Aside from this, Oracles can also be used for triggering pre-automated smart contract functions using off-chain data. Oracle is a key piece of tech required for Web3 and a decentralised ecosystem to take the next big step in mass adoption. This is because, without a tool/means to establish communication with off-chain data, blockchain networks will remain a closed network ecosystem. Only with a means to feed off-chain data to an on-chain ecosystem, can we help bring about the mass adoption of Web3 and a decentralised ecosystem across all sectors in the move from Web2-based infrastructure to Web3-based infrastructure.
While a highly useful tool, there is very little awareness surrounding Oracles. It is an emerging piece of tech which is also highly debated about as there is a concern that data from external sources can always be used to manipulate on-chain activity. But there are various types of oracles currently under development with various parameters in focus to ensure oracles can serve as a trusted source of data/information.
Some of the common types of Web3 oracles in existence include — Software and Hardware Oracles focused on inbound/outbound communications, Cross-chain Oracles and Consensus Oracles.
The Parameters used to define the usefulness and authenticity of an Oracle are -
- Correctness — Ensuring the authenticity and integrity of data.
- Availability — Ensuring that data is available on-demand to facilitate instantaneous/smooth processing of transactions.
- Incentive Compatibility — The ability of Oracle providers to incentivize data providers to share accurate/authentic data.
In today’s Web3 and DeFi ecosystem — Oracles are used mainly in these two scenarios — gaming and dApp communication.
Oracle in Gaming — When it comes to games and sports-based betting, a lot of core working mechanism revolves around randomness and predictability. But, by its default nature and inherent design, the working mechanisms behind blockchain make events predictable via resolving cryptographic algorithms and mathematical equations. Apart from the concept of randomness, the login behind game designs is highly complicated.
Oracles make it possible for Random number generation in the blockchain ecosystem via Virtual Routing and Forwarding facilitated by an oracle network with task-agnostic architecture. Any process that is hard to handle when trying to deploy directly on-chain can be resolved by sourcing data off-chain via unique and custom-designed task-agnostic oracle networks in a secure manner
Oracle in dApp Communication — DeFi, Banking & Insurance, Logistics/Supply Chain Management
DeFi — Oracles are used by dApp to source price data of tokens from different blockchains and fiat assets from centralised entities that can be considered external sources.
Banking & Insurance — Any new customer-related information being fed into a blockchain network or claims, deposit/withdrawal requests raised by clients serve as external data and need an oracle to be fed into the blockchain network.
Logistics/Supply Chain Management — The movement of assets between different warehouses and ports, information on assets stored in various locations and assets in transit that are tracked via GPS are various data normally present in logistics and supply chain management scenarios that can be considered external data. An oracle is required to source data from multiple external sources and analyse them before feeding it into the blockchain network.
