In the blockchain industry, Oracle is essentially a data resource that serves as a bridge between smart contracts and other external resources. Oracle is a factor that not only interacts with external data sources but also verifies the accuracy of the provided data. Blockchain oracles enable blockchains to connect to external systems easily. Thus, smart contracts can run based upon inputs and outputs from the real world.
What Is an Oracle?
Not all data on the internet are accessible on-chain. In other words, blockchains have no access to information except they are on-chain. An Oracle is an operator that can interact with different databases outside the blockchain space. It must be able to go “off-chain” and gather relevant information for a smart contract to know when to execute.
Oracle works based on the fact that blockchain smart contracts can only access the on-chain data. Thus, they act as a communication tool that converts real-world events into a digital version and stores and uses it in the form of data.
Different Types of Oracles in the Blockchain
Due to the wide range of resources outside the chain, blockchain oracles come in various forms and sizes. Combined smart contracts require not only different types of external data and computing but also need a variety of delivery mechanisms and security levels.
Generally, each type of oracle involves a combination of receipts, validations, related calculations, and deliveries to the destination.
1) An Inbound Oracle
The most well-known type of oracle in the blockchain is called the Oracle Inputs, which receives data from the real world (off-chain), delivers it to a blockchain network, and prepares it for use in smart contracts.
2) An Outbound Oracle
An Outbound Oracle allows smart contractors to send commands to off-chain systems and force them to perform specific actions. For example, smart contracts can send information to a banking network to accomplish payment.
3) Cross-Chain Oracles
Another type of oracle is a cross-chain oracle that can read and write data between different blockchains. Cross-chain oracles enable interoperability to move data and assets between two blockchain networks. For example, these oracles can use data in a blockchain to summon the start of a process in another blockchain.
4) Compute-Enabled Oracles
A new type of oracles becoming more widely used by smart contracts applications is “compute-enabled oracles,” which are applicable for computations that cannot be carried out on-chain due to various reasons like block constraints and cost of computation.
Blockchain Oracle Usages
- Decentralized Finance (DeFi)
- Dynamic NFTs and Gaming
Every blockchain ecosystem must have a reliable mechanism connecting smart contracts and the real world. Without Oracle Blockchain, smart contracts can only interact with the information in trusted networks, limiting their activities. Blockchain oracles are one of the essential factors for the growth of the blockchain ecosystem.