Blockchain technology is inherently isolated from the outside world.
Its defining features — decentralization and security – can only be achieved by ensuring the network operates independently of external systems.
This isolation limits a blockchain's use cases to within its own ecosystem, hindering the integration of real-world data necessary for more complex and impactful uses.
The solution? Blockchain Oracles.
Oracles are the crucial bridge that connects blockchains with external data sources, enabling multiple applications for blockchain across various industries.
What are Blockchain Oracles?
Blockchain oracles act as intermediaries between the blockchain and the outside world. Their primary function is to fetch, verify, and transmit data from external sources to the blockchain.
Types of Blockchain Oracles
- Input Oracles: Fetch data from external sources and deliver it to the blockchain. E.g., price feeds for DeFi applications.
- Output Oracles: Send data from the blockchain to external systems, triggering actions such as payments or data storage.
- Cross-Chain Oracles: Facilitate data transfer between different blockchains, enabling interoperability and the movement of assets across chains.
- Compute-Enabled Oracles: Perform complex computations off-chain and deliver the results on-chain, useful for applications requiring verifiable randomness or privacy computations.
- Hardware Oracles: Gather data from the physical world through sensors and devices, relaying it to the blockchain.
- Human Oracles: Rely on individuals to provide data based on their expertise, such as weather reports or election results.
The Importance of Blockchain Oracles
Enhancing Smart Contracts
Oracles allow smart contracts to interact with real-world data, making them far more versatile than if they relied on on-chain data alone.
For example, an insurance smart contract can automatically pay out claims based on real-time data provided by an oracle.
Enabling Decentralized Finance (DeFi)
DeFi applications heavily rely on real-time price data to function effectively. Oracles provide these applications with the necessary data, enabling functionalities like automated trading, lending, and yield farming.
For instance, Chainlink, a leading decentralized oracle network, provides reliable price feeds that help secure billions of dollars in the DeFi ecosystem.
Additional Use Cases
- Insurance: Automating claims based on verifiable events such as flight delays or natural disasters.
- Supply Chain: Tracking the movement and condition of goods in real-time.
- Gaming: Ensuring fairness through verifiable randomness in in-game rewards and events.
- Sustainability: Incentivizing eco-friendly practices by verifying and rewarding actions like reduced energy consumption or recycling.
The Oracle Problem
Although Oracles are highly beneficial to the blockchain industry, they face one big challenge: the potential for incorrect or manipulated data.
This is a particularly big problem with centralized oracles, which can become single points of failure.
How can you trust the data the Oracle is submitting to the smart contract is accurate or uncompromised?
Solution: Decentralized Oracle Networks (DONs)
To mitigate the risk of compromised Oracle inputs, Decentralized Oracle Networks (DONs) have been developed.
These networks use multiple independent nodes and data sources to ensure the accuracy and reliability of the data.
For example, Chainlink's DONs use a multi-layered approach to decentralization, combining data from numerous sources and verifying it across multiple nodes to prevent manipulation.
Future of Blockchain Oracles
The potential applications for blockchain Oracles are only set to expand as the industry and technology mature.
Innovations such as Chainlink's Cross-Chain Interoperability Protocol (CCIP) aim to set standards for secure and decentralized cross-chain communication, further enhancing the capabilities of blockchain oracles.
Blockchain Oracles are also set to play a crucial role in sustainability efforts by facilitating eco-friendly initiatives and ensuring compliance with environmental standards.
How to Invest in Blockchain Oracles
Blockchain oracles are indispensable in bridging the gap between the isolated world of blockchains and the dynamic real world.
As decentralized Oracle networks continue to evolve and improve, their role in the blockchain ecosystem will only grow more significant, paving the way for a more connected and functional decentralized world.
You can invest directly in industry-leading blockchain Oracle projects through Bake’s New World Oracles Bundle. The bundle allows you to invest in a share of LINK, PYTH, BAND, ORAI, TRB, UMA, API3, and DIA in just a couple of taps.
DISCLAIMER: Please note that the information on this blog and in any articles posted on this blog is for general information only and should not be relied upon as financial advice. Cake Pte. Ltd., Cake DeFi, UAB, and its affiliates (the “Cake Group”) are not licensed financial advisers. You may wish to approach your own independent financial advisor before making any decision to buy, sell or hold any product and/or digital assets mentioned in this blog.
Any views, opinions, references, assertions of fact and/or other statements are not necessarily the views held by the Cake Group. The Cake Group disclaims any liability whatsoever that may arise out of or in connection with such statements. Always do your own research before investing in any financial assets and consult a qualified financial advisor if necessary.
