Once used to describe a wise and prophetic individual, the term oracle has taken on a somewhat similar, if modernized, meaning in the context of blockchain technology — since blockchain oracles are essentially trusted purveyors of information.
But rather than conveying information between individuals, blockchain oracles instead securely transmit information to and from smart contracts. Despite being simple messengers, this function fills a crucial function in today’s blockchain landscape, and enables smart contracts to do more than previously thought possible.
What Are Blockchain Oracles?
Before we get into exactly how blockchain oracles are powering an entire new wave of decentralized finance (DeFi) applications, let’s first explore what exactly constitutes a blockchain oracle.
The common consensus is that a blockchain oracle is a service designed to deliver data to smart contracts. These can be either third-party oracle services or be built in as a standard function of the blockchain.
Oracles can be bidirectional or unidirectional, centralized or decentralized — in any combination. Most oracles extract and relay information from software (typically databases) to smart contracts, whereas others interface with hardware devices like weather sensors, random number generators (RNGs), and a variety of Internet of Things (IoT) devices.
There are now a wide variety of different oracle platforms in operation. Most of these are simply designed to securely transmit off-chain data to smart contracts and pipe blockchain-based information to non-blockchain-based applications. While some are also capable of transmitting information between blockchains, allowing for either unidirectional or bidirectional communication between chains (i.e. interblockchain communication).
Even humans can serve as a data source for some oracles, e.g. by acting as a final source of truth for certain data or when the request in question requires an expert opinion as a response. Moreover, many oracle providers are capable of querying data from a variety of sources and aggregating it together to improve accuracy.
Chainlink’s Data Feeds are one of the most commonly used blockchain oracles
Given that most blockchain oracles are at least partially decentralized, they typically employ a system that incentivizes uptime, reliability, and accuracy, while penalizing oracles that underperform or act maliciously — such as by providing invalid data or failing to respond to queries.
Benefits and Applications
Blockchains are incredibly secure and resilient systems, largely thanks to the fact that they are generally isolated from external influences and manipulation.
But in some cases, external data is necessary for the functioning of blockchain-based applications — since there is a limit to what can be achieved with only on-chain data. For example, it would be impossible to create applications that respond to the results of an election, changes in the stock market, or even the weather without oracles.
But with the advent of blockchain oracles, these limitations have been completely removed, and it is now possible to connect smart contracts with real-world data to power a huge range of new applications. In particular, blockchain oracles allow individuals and businesses to more easily communicate data to the blockchain while allowing oracles to easily query any of the millions of centralized APIs as a data source.
Synthetix uses Chainlink oracles to price its synthetic assets (known as “synths”)
Indeed, blockchain oracles have proven to be a critical component in modern DeFi infrastructure, and have enabled a huge range of DeFi applications — including prediction markets, provably fair gambling systems, decentralized insurance protocols, synthetic assets, and decentralized ETFs to name just a few use cases.
This offers a variety of unique benefits which could help to improve the blockchain industry as a whole. For example, blockchains could use oracles to achieve off-chain computation to reduce the storage and computational burden on a blockchain to increase its scalability. Likewise, they can also be used for seamless blockchain interoperability — helping to power things like atomic swaps and state channels used to move value and data between chains.
How Are Oracles Being Used Today?
Despite the first major blockchain oracles appearing just four years ago with the 2017 ICO boom, the blockchain oracle space is now brimming with innovation and variety — and there are now well over a dozen different oracle providers either being developed or currently up and running.
Some of the most popular oracle providers currently include the likes of Chainlink, Band Protocol, and DIA — each of which is already being used to power a wide range of use cases, including:
- Arbol uses Chainlink’s oracles to query weather data for its weather-centric risk products.
- Etherisc leverages Chainlink’s oracles to power a range of decentralized insurance products, including crop and flight insurance.
- Synthetix uses Chainlink’s price feeds to price its synthetic assets.
- Polychain Monsters uses Chainlink’s Verifiable Random Function (VRF) to fairly and randomly assign NFTs to booster packs.
- Mirror Protocol leverages Band Protocol’s oracle network to secure some of its mirrored assets.
- Secret Network recently implemented Band Protocol’s oracle-based price feeds to help kickstart its DeFi ecosystem.
- KyberSwap leverages Band Protocol’s low latency price feeds to tackle price manipulation on its decentralized exchange platform
- Alpha Finance integrated Band Protocol’s price oracles for its Alpha Homora yield farming product.
- PAID Network partnered with DIA to leverage its data feeds to power its SMART Agreement technology.
- Polkalokr partnered with DIA to integrate its data oracles into its decentralized escrow platform.
- Horizon recently pledged to integrate DIA’s data oracles with its ecosystem through a dedicated sidechain.
Paid Network will leverage DIA’s oracle technology to help streamline business agreements
As you can see, blockchain oracles are already being applied to a wide range of use cases — most of which leverage oracles to securely gather and relay pricing data.
Despite their popularity, a number of challenges still remain when it comes to maximizing the utility these tools can provide. This includes eliminating the risk of inaccurate data and man-in-the-middle attacks, as well as reducing the costs and latency that can be associated with querying oracles on certain blockchains.
Nonetheless, given the significant progress that has been made in the last four years, it is becoming increasingly apparent that blockchain oracles are becoming an integral part of the DeFi landscape, and will only continue to evolve in capabilities in the months and years ahead.
About Master Ventures
Master Ventures is a blockchain-focused venture studio helping to build the next generation of blockchain-based Web 3.0 system innovations within the crypto industry. Launched in 2018 by Founder and CEO Kyle Chassé, the company’s ethos can best be summarized in the acronym #BeBOLD: Benevolent, Open, Love, Decentralized.
Master Ventures co-creates with entrepreneurs and businesses worldwide to turn the best ideas into innovative and disruptive products. They do this by investing as strategic partners through offering advisory services to the projects they believe in. To date, Master Ventures has invested in over 40 crypto projects, including the likes of Kraken, Coinbase, Bitfinex, Reef, DAO Maker, Mantra DAO, Thorchain, and Elrond.
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