Blockchain Oracles and their Components
Tags: blockchain, oracle
Published: 2023-05-03 00:14:33

by [Chioma Sarah Onugha](https://blog.openreplay.com/authors/chioma-sarah-onugha)

<blockquote><em>Blockchain oracles are a crucial component of many decentralized applications requiring real-world data access, enabling smart contracts to interact with external data sources and execute their functions autonomously without relying on centralized intermediaries, and this article will tell you everything about their features, functions, and usage.</em></blockquote>

[Oracles](https://chain.link/education/blockchain-oracles) play a major role in the running of [blockchain](https://www.blockchain.com/)-based applications, as they are responsible for bringing real-world data into the otherwise isolated and self-contained blockchain environment. [Blockchain](https://en.wikipedia.org/wiki/Blockchain) oracles are entities or services that provide external data to a blockchain network. This data can trigger smart contracts or provide information to dapps (decentralized applications) that run on the blockchain. [Oracles](https://ethereum.org/en/developers/docs/oracles/#) obtain data from different sources, such as APIs, data feeds, and other online sources. To guarantee the authenticity and integrity of the data that they provide, oracles often use multiple sources and employ methods such as consensus algorithms to validate the data before transmitting it to the blockchain.

## Types of blockchain oracles
There are several [types](https://ethereum.org/en/developers/docs/oracles/#types-of-oracles) of blockchain oracles, including:

- Inbound Oracles: These oracles provide data from external sources to smart contracts on the blockchain. They are the most common type of oracle and are used to bring real-world data into the blockchain environment.

- Outbound Oracles: These oracles send data from the blockchain to external sources, such as APIs or data feeds. Oracles are mediator services that act as a link between a blockchain network and the external world, providing information about real-world events and data to smart contracts and decentralized applications (dApps) running on the blockchain.

- Centralized Oracles: These oracles are run by a single entity and are responsible for providing data to the blockchain. They are often used by dapps that rely on real-time data from a specific source.

- Decentralized Oracles: These oracles are run by a network of nodes and are designed to be more secure and reliable than centralized oracles. Decentralized oracles often use consensus algorithms to validate the data they provide, reducing the risk of data tampering or manipulation.

- Hardware Oracles: These oracles use physical devices, such as sensors or IoT devices, to provide data to the blockchain. They are often used in industries such as supply chain management and are an important component of the Internet of Things (IoT).

The type of blockchain oracle that is used depends on the specific needs of the blockchain application. Different types of oracles offer different levels of security, reliability, and trust, and it is important to choose the right type of oracles for your specific use case.

## Components of blockchain oracles
Blockchain oracles typically have three main components:

### Data Source
This is the external source of information that the oracle retrieves data. It could be a website, an API, a sensor, or any other source that provides relevant data. The data source used by an oracle can vary depending on the specific implementation, but some common sources include:

        - APIs: Oracles can extract data from public or private APIs and send it to a smart contract. This data occur from various sources, like stock prices, weather data, or sports scores.
        - Web Scraping: Oracles can use web scraping techniques to extract data from websites and provide it to smart contracts.
        - Manually entered data: In some cases, oracles can collect data through manual inputs, such as a user entering data into a web form.


### Oracle Node
This is the software that retrieves data from the data source and broadcasts it to the blockchain. It may also perform data validation and formatting. This is the software component that runs the oracle and facilitates the communication between the data source and the blockchain. The oracle node retrieves data from the data source and broadcasts it to the blockchain.


### Smart Contract 
The [smart contract](https://ethereum.org/en/developers/docs/smart-contracts/) is the code on the blockchain that interacts with the oracle. It specifies the conditions under which the oracle should provide data and what the oracle should do with the data it receives.

## How blockchain oracles work
Here's how a blockchain oracle typically works:

1. A smart contract on the blockchain sends a request to the oracle for specific data.
2. The oracle retrieves the requested data from an external source, such as a website or an API.
3. The oracle verifies the authenticity and accuracy of the data using various mechanisms such as consensus, reputation, and cryptographic proof.
4. Once the data is verified, oracle sends it back to the smart contract on the blockchain.
5. The smart contract can then execute predetermined actions based on the received data, such as releasing funds, initiating a transaction, or triggering a contract.

It's important to note that oracles can have varying degrees of decentralization and security, and their reliability can be a concern. Therefore, it's essential to carefully evaluate and choose an oracle that meets the specific requirements of the blockchain application.

## Comparing blockchain oracles
There are several blockchain oracles in the market, and they differ in terms of their features, performance, and use cases. Here are some of the most popular blockchain oracles and their comparisons:

- [Chainlink](https://blog.chain.link/what-is-chainlink/) is one of the most famous blockchain oracles widely used, and it provides a decentralized platform for connecting smart contracts with off-chain data. It has an extensive network of nodes and offers high reliability and security. Its modular architecture and customizability make it ideal for various use cases. However, Chainlink can be expensive compared to other oracles. Chains supported: Ethereum virtual machines Chains (EVM), Solana, Terra
 
- [Band Protocol](https://bandprotocol.com/) is another popular blockchain oracle that offers similar features to Chainlink. It uses a proof-of-stake consensus mechanism and offers a high throughput and low latency. It also provides customizability and has lower fees than Chainlink. However, Band Protocol has a smaller node network than Chainlink.

- [DIA](https://www.diadata.org/) (Decentralized Information Asset) is a decentralized data platform that provides access to various data sources, including financial data, market data, and social media data. It offers high accuracy and transparency and is designed to be integrated with multiple blockchain platforms. However, DIA has a smaller node network than Chainlink and Band Protocol.

- [Augur](https://augur.net/) is a prediction market platform that uses oracles to provide reliable and accurate data for prediction markets. It offers high decentralization and transparency and allows anyone to create their markets. However, Augur is not as fast or scalable as other oracles, and it has a steeper learning curve.

Summing up the comparison, the choice of blockchain oracle depends on the specific use case and requirements. Chainlink and Band Protocol are ideal for high reliability and customizability, while DIA is suitable for accessing various data sources. Augur is ideal for prediction markets.

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## Use cases of blockchain oracles
Blockchain oracles are essential components of blockchain networks, as they allow smart contracts to interact with data and systems outside of the blockchain. Here are some of the main use cases for blockchain oracles:

- [ Decentralized Finance (DeFi)](https://www.blockchain-council.org/blockchain/decentralized-finance-101-a-complete-guidebook/): Oracles are extensively used in DeFi platforms to obtain real-time price feeds, transaction data, and other critical information. Oracles help to execute smart contracts and allow for interoperability between various blockchain networks.  Oracles are essential for DeFi applications, which rely on real-time market data to execute trades, calculate interest rates, and provide other financial services.

- Gaming and Prediction Markets: Blockchain oracles play a vital role in gaming and prediction markets by providing real-world data feeds, such as sports scores, weather information, and other factors that determine the outcome of a game or event. Oracles can be used to verify the outcome of games, ensuring that results are fair and transparent. E-games use verifiable randomness to promote engagement and uncertainty in their ecosystems.

- Supply Chain Management: Oracles can be used to provide real-time data on the supply chain network, tracking the movement of goods and verifying their authenticity. This can help to improve transparency, reduce fraud, and improve supply chain efficiency. Oracles can be used to monitor and verify supply chain data, such as tracking the origin and movement of goods, ensuring compliance with regulations, and verifying the authenticity of products.

- Insurance: Insurance companies can use oracles to get real-time data on weather, traffic, or other factors that could affect claims. This can help to speed up the claims process and reduce fraud.

- Identity Verification: Oracles can help to verify the identity of users on the blockchain network by integrating with third-party identity verification services. This aids in reducing the risk of fraud and ensures that only verified users can participate in the network.

## The oracle problem

One of the major [concerns with oracles](https://blockpit.io/en/blog/how-to-solve-the-oracle-problem/#) is the possibility of data tampering, as they are not part of the decentralized network. An oracle that provides incorrect or manipulated data can compromise the integrity of the entire blockchain system. Therefore, ensuring the reliability and security of oracles is crucial in blockchain applications.

Furthermore, the cost of using oracles can be high, as it requires payment for the data to be transferred and processed. Additionally, the momentum at which data is transferred can be slow, which can be problematic for time-sensitive transactions.

Overall, the blockchain oracle problem highlights the need for secure, reliable, and efficient ways to bring off-chain data onto the blockchain while also addressing the challenges of tampering and cost. To address these issues, new technologies and approaches, such as decentralized oracles and trusted data sources, are being developed to make oracles more reliable and secure in blockchain applications.

## Conclusion

The development of blockchain oracles is still in its early stages, and there is a need for continued research and development to address the challenges and improve the technology. Nonetheless, blockchain oracles have the prospect of transforming many industries by facilitating the creation of decentralized applications that can interact with the real world securely and efficiently.