- Oracles connect real-world information to blockchain, allowing smart contracts to execute transactions that rely on information outside the blockchain with assurance the information hasn’t been tampered with.
- Decentralized oracles solve the centralization problem by using distributed data sources to avoid single points of vulnerability.
Why Do Blockchains Need Oracles?
Blockchain technology has emerged as one of the most revolutionary inventions in recent times. However, blockchains can only access the transactions recorded on its distributed ledger, which limits the number of applications that can be used without real-world information.
Oracles are lines of code that connect information in the real world to contracts and other agreements on a blockchain. They serve as a bridge between on-chain and off-chain data, allowing smart contracts to execute transactions that rely on information outside the blockchain with assurance the information hasn’t been tampered with.
Cryptocurrency’s total market capitalization hovers around $1 trillion, but this number is only a fraction of the potential blockchain could unlock. According to McKinsey, the global financial system transacted over $5.76 trillion in a single year and is worth upwards of $487 trillion.
The US residential real estate industry is estimated to be worth $43.4 trillion according to Zillow, and the U.S. healthcare system is estimated to be worth $4.1 trillion according to the Center for Medicare and Medicaid.
The Importance of Decentralized Oracles
While oracles solve one problem for blockchains by giving them access to real-world information, they create another in the form of centralization. Decentralized oracles solve the off-chain data problem by granting blockchains access to real-world information without introducing a single point of failure.
They do this by using distributed data sources to avoid single points of vulnerability. If blockchains were to adopt centralized oracles, this would introduce a single-point vulnerability, which counteracts everything a decentralized network is built for.
How Decentralized Oracles Solve the Problem
Decentralized oracles use distributed data sources to avoid single points of vulnerability. For example, decentralized exchanges can provide price feeds for various assets like ether and bitcoin without a central authority. Decentralized exchanges allow individuals to swap assets directly with one another via a shared, open ledger that no one owns.
However, they have no way to access the current price of ether or bitcoin in terms of dollars. A decentralized oracle such as Chainlink can provide the exchange with a price feed by using dozens of different data providers to create a single price feed.
Types of Oracles
Oracle systems can be distinguished from each other by their data sources, the direction the information moves, and the way the data earns user-trust. This illustrates whether the oracle is a decentralized or centralized system. Even though centralized systems can create single points of failure, many users prefer them to the more experimental alternatives.
Why Oracles Are Important for Blockchain
The figures highlight the size of the value that is available off-chain and demonstrate the importance of a bridge between centralized and decentralized systems. In order for these systems to access the power of smart contracts, they need decentralized oracles to ensure secure and immutable data on the blockchain to expand its real-world use cases.
In conclusion, oracles serve as a bridge between on-chain and off-chain data, allowing smart contracts to execute transactions that rely on information outside the blockchain with assurance the information hasn’t been tampered with. Decentralized oracles solve the centralization problem by using distributed data sources to avoid single points of vulnerability. Oracles are important for blockchain to expand its real-world use cases.
However, for blockchain to expand its real-world use cases, it needs to connect to the massive market value outside the blockchain. This is where Chainlink and decentralized oracles come in.
