Can you imagine making decisions with little information? It’s complicated, right? That is why when smart contracts need data that is not on a blockchain to operate, they are forced to consult external sources through the Oracles. Find out what an oracle is and how it works.
Smart Contracts are predetermined agreements through code that automate processes based on existing information on the blockchain (addresses, balances, etc.). For example, the owner of a car wash creates a Smart Contract in which he automates that every time his address reaches 3 BTC, 0.1 BTC is sent to each employee as an incentive.
But sometimes, these Smart Contracts may need information external to the Blockchain to operate. For example, an automated Smart Contract so that every time it rains, money is refunded to people who have washed their car that day in the laundry room. In this case it would be necessary to use a Blockchain Oracle.
What is a Blockchain Oracle and how does it work?
A Blockchain Oracle is a service offered by third parties that is responsible for providing external information (outside the blockchain) to Smart Contracts, so that they can make decisions. In the previous example of the car wash, the Oracle Blockchain would be the one in charge of obtaining the precise information on when and where it has rained to decide if the Smart Contract should be executed or not.
In short, the oracle is responsible for providing the Off Blockchain data so that the smart contract can meet the conditions previously stipulated in the contract.
Data flow between a smart contract, an oracle and an external information source.
It is important to note that a blockchain oracle is not the source of the information itself, but the layer that consults, verifies and authenticates external data sources, and then transmits that information.
Types of Blockchain Oracles
There are two categories for Blockchain Oracles depending on the source from which they obtain the data.
Software Oracles
These are the most popular oracles and they work linked to online information sources, such as databases, servers, web pages, etc..
Hardware Oracles
These oracles work linked to information sources in the physical world, such as barcode scanners or electronic sensors, and “translate” real-world events into digital values so that info can be understood by a smart contract.
Information sources of each type of oracles.
Blockchain Oracles Problems
As almost all development in its early stages oracles still need to improve certain aspects and one of the main ones is trust. Centralization in the sources of information directly affects the credibility of the oracles, so projects like Provable or Chainlink work with the objective of creating a decentralized oracles that collect information from various sources to synthesize them into a single result.
Despite the fact that the development of the Blockchain Oracles is still in a maturity phase, progress is relentless and continues to make our blockchain predictions for 2020 come true, promoting the use of Smart Contracts and the adoption of blockchain technology.
You have already learned what blockchain is and how it works and now also what is a blockchain oracle. If you want to learn even more about the crypto world you can continue browsing our blog where you will find very interesting and updated information on various topics in the sector.
