What is an oracle

Blockchain oracles are entities that connect blockchains to external systems, allowing smart contracts to execute depending on real-world inputs and outputs.

Oracles give the Web 3.0 ecosystem a method to connect to existing data sources, legacy systems, and sophisticated calculations. DONs enable the implementation of hybrid smart contracts, in which on-chain code and off-chain infrastructure are coupled to provide complex decentralized applications (dApps) that react to real-world events and interact with traditional systems.

Let's say Lucy and Mark wish to bet on the outcome of a sporting event. The $60 total is held in escrow by a smart contract, with Lucy betting $30 on team A and Mark betting $30 on team B. How does the smart contract know whether to give the money to Lucy or Mark after the game is over? The explanation is that it requires an oracle method to obtain precise match outcomes off-chain and securely send them to the blockchain.

The blockchain oracle dilemma highlights a key drawback of smart contracts: they are unable to communicate with data and systems outside of the blockchain context. External resources are referred to as "off-chain," whilst data currently recorded on the blockchain is referred to as "on-chain." Blockchains achieve their most beneficial qualities by being purposefully separated from external systems, such as high consensus on the authenticity of user transactions, avoidance of double-spending assaults, and network downtime mitigation. To securely interoperate with off-chain services from a blockchain, an extra piece of infrastructure known as an oracle must be installed.

Because the great majority of smart contract use cases, such as DeFi, need knowledge of real-world data and events occurring off-chain, solving the oracle problem is critical. As a result, oracles broaden the sorts of digital agreements that blockchains may enable by providing a universal gateway to off-chain resources while maintaining blockchain security. Asset pricing in banking, weather information in insurance, unpredictability in gaming, IoT sensors in supply chain, ID verification in government, and many more sectors benefit from integrating oracles with smart contracts.

Because the data given by oracles to blockchains directly influences the outcomes of smart contracts, it is crucial that the oracle mechanism be valid if the agreement is to execute as planned.

A single point of failure is introduced by blockchain oracle systems that use a centralized entity to transmit data to a smart contract, negating the fundamental goal of a decentralized blockchain application. If the single oracle goes down, the smart contract will either not have access to the data it needs to run or will run incorrectly due to outdated data.

Worse, if the single oracle is compromised, the data given on-chain may be significantly inaccurate, causing smart contracts to execute incorrectly. This is known as the "garbage in, garbage out" problem, in which faulty inputs result in terrible outputs. Furthermore, because blockchain transactions are automated and irrevocable, a smart contract decision based on erroneous data cannot be undone, implying that user cash may be lost forever. As a result, smart contract applications cannot use centralized oracles.