What is a Blockchain Oracle & How does it Work?
Blockchain technology has been expanding all over the world. This technology allows for smart contracts and centralized applications to run on top of it.
And it is not necessary to have the permission of a third party.
Smart contracts work in a very simple way. A developer codes them expecting to be executed once certain conditions are met.
Currently, the most famous network to run and deploy smart contract is Ethereum. Developers working here need to code the smart contracts using a programming language known as Solidity.
This language has a specific characteristic, it follows the ‘if this then that’ logic. However, they cannot interact with the outside world.
This is where Oracles appear, playing a very important role collecting informationand providing it to the smart contracts.
Once these smart contracts have the information, they can analyses it. In this way, they will be able to execute the code written by the developer. So clearly, Oracles play a key role providing information to smart contracts.
What is an Oracle Blockchain?
Some applications do need to use more data than what they are able to gather. Blockchain oracles are able to collect this data and provide it to the smart contracts.
Without Oracles, there would be no connection between dApps and data. In some cases, smart contracts cannot continue with their work unless they have the data that Oracles provided.
For example, if we talk about a financial application, Oracles may provide market information. Instead, if the smart contract needs data about a hospital or a school, the Oracles will send the information.
In sum, Oracles play a very important role in the crypto market. They allow smart contracts to execute properly and dApps to smoothly run. Without Oracles, these applications and contracts would not be able to work efficiently.
Blockchain oracles are very important for prediction markets. Augur (REP) is one of the examples. Augur is a prediction platform in which users place their bets on real world events.
Augur cannot directly have an interaction with participants in the network. If the network would rely on them, they could provide manipulated outcomes.
Oracles can be used here to give reliable information about different events or situations. Once the data is gathered, Augur analyses the data and takes a decision.
There are some wallets that could use Oracles. A multisig wallet, developed to transfer funds when certain criteria is met, could use Oracles to receive information on some data points.
The wallet would only send the funds just if it has the necessary information. Otherwise, the funds would remain in the wallet and the transaction would not be executed.
Understanding Different Types of Blockchain Oracles
There are two important distinctions between oracles. There are software and hardware oracles. Both of them have different features according to their functions.
Software oracles collect information from the web. They have no contact with sources outside of the internet.
Hardware oracles, instead, collect information from the real world. Both of them, once they collect the data, send it immediately to the smart contract.
Software oracles need to be very careful with the data collected. If the information is wrong, that could trigger an unwanted result. Nonetheless, software oracles are reliable due to their speed and reliability.
Hardware oracles are different. They can only provide information about temperature or other data points.
But they do not rely on the internet for it. After gathering the information required, it will send it to the dApp or smart contract.
There is another important distinction between oracles. They can be centralized or decentralized.
The centralized oracles have a single input fed into the oracle, from a source or an API. With centralized oracles, it is not possible to verify the authenticity and accuracy of data.
Decentralized oracles work in another way. They do not depend on just one source to collect data.
More articles can provide additional information on whether the data provided is correct. In this way, corrupted oracles can be removed from the network.
As mentioned before, the Augur platform uses oracles to gather information and work. Augur offers a prediction and betting platform which relies on its members to report certain outcomes.
The system has decided to implement decentralized oracles. This would clearly help avoid wrong information to be provided and trigger bad results.
However, it is very important to know that oracles may fail. They can suddenly start to rely on incorrect or inaccurate information. This would certainly have a very negative impact on the platform or decentralized application.
It is very important to incentivize oracles for them to work efficiently and send the correct information.
With oracles working properly, the overall network will experience an improvement. Smart contracts will be executed as they should, making the network more efficient.
If there is an oracle that provides wrong information, then, it should be penalized. That is if the data provided deviates from the mean input that other oracles provided.
At the moment of writing this article, Augur is the 40th most important cryptocurrency in the market. It has a market capitalization of $227 million dollars and each REP token can be bought for $20 dollars.
Blockchain Oracles – Conclusion
In this article, we have explained what blockchain oracles are, which are the main differences between them and how they work. They are a great tool for networks.
Decentralized applications can receive information about the outside world and work in consequence.
In order to rely on them, it is necessary to have an important level of trust. Interestingly, that goes against the decentralized nature of blockchain networks.
This is why smart contracts need to rely on different oracles and mitigate the amount of trust required.
Oracles are a necessary tool to improve the efficiency and range of action of dApps. But it is always important to remember about decentralization.
With more oracles sourcing a smart contract, the less trust that network will require. Thus, this will help maintain the core principle of blockchain networks: decentralization.
Feature Image: shutterstock.com
In Post Image: medium.com, blockchainhub.net, shutterstock.com
DisclaimerThe writer’s views are expressed as a personal opinion and are for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.
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