Blockchain, commonly referred to as a decentralized digital ledger, eliminates the need for third parties to verify transactions, providing users with the best standards of security, transparency, and immutability. Some blockchains also support "smart contracts," which are automated computer programs used to carry out any contract when predetermined conditions are met.
The validation of transactions is based on on-chain data and is often carried out by the nodes in the network by reaching a consensus. However, many blockchain projects require constant interaction with external sources of information. For smart contracts to have real-world applications, blockchains and on-chain smart contracts must be able to use external, off-chain data.
For example, if you want to buy a car with cryptocurrency, you can create a basic smart contract. The contract will look something like this: "If party X sends the required amount of funds to party Y, the ownership of the car is transferred from party X to party Y." The smart contract is executed irreversibly if these required conditions are met.
Off-chain data that is required in the above example of a car transaction could be proof of successful payment or proof of receipt of the ownership. Because blockchains are isolated systems, oracles come into play here. Let’s have a detailed look at them.
What are Blockchain Oracles?
Blockchain Oracles are third-party services that help blockchains or smart contracts interact with outside data (off-chain data). Outside data must be communicated to the closed blockchain system in many cases, particularly when smart contracts are linked to real-world events. Oracles work as a bridge between on-chain and off-chain data.
Oracles are crucial elements of the blockchain ecosystem because they expand the range of use cases for smart contracts. Smart contracts would be ineffective without blockchain oracles since they could only access data within their networks.
For more clarity, the blockchain oracle is not the data source itself but rather the layer that queries, verifies, and authenticates external data sources before relaying that information. They can also be viewed as an application programming interface (API) for a blockchain to the outside world.
How Do Blockchain Oracles Work?
Oracle data can take many forms, such as price information, the successful completion of a payment, or the temperature measured by a sensor. There are numerous types of oracles, and how an oracle operates is entirely dependent on its intended use.
The basic workflow of an oracle begins with the smart contract of a blockchain sending a data request to Oracle. An oracle is typically a hybrid smart contract composed of some on-chain and some off-chain components.
