The importance of oracles in the blockchain technology 

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The art of divination, which was also attributed to oracles in the old times, is not so different from the mission given to oracles in the blockchain technology.

Indeed, in this context, oracles are tools used to consolidate already existing data, with third party information such as bad weather, random events, or prices…etc. 

They are therefore steering channels with an impact on the realization or not of actions both on the blockchain and in the real world.

This type of tool is increasingly found in areas such as insurance, connected objects (IoT), and in crypto. 

A good example is the annual insurance premium, whose price depends on predefined risks. 

But then, why does the blockchain need information from oracles? And what are the concrete applications of oracles in our daily lives?

Blockchain limits and oracles

The blockchain technology allows to process data in an encrypted and secure way.

Nevertheless, there is a problem with the supply of data, which has some limitations, for security reasons.

Indeed, the blockchain does not feed itself directly with data from external networks (off-chain).

This is precisely because the blockchain is characterized by its ultra-secure aspect.

It is therefore necessary to limit as much as possible any direct contact of the blockchain with the real world. 

And considering the infinite number of data that circulate and that we need (health, finance, services… etc), it is impossible to process everything in record time with a simple shield.

So, which system should we use? And why do we need so many variables in the processing of information? 

Oracles, blockchain partners

Data and its variables, a necessity to take into account

Without variables, it is impossible to consider all possible eventualities in a given case.

It is impossible, for example, to condition a choice on the occurrence of a particular event.

And without conditions, without options, how can you diversify your offers? How can we take into account the various needs?

(For example, should we treat all people with the same pathology in the same way? No, because each individual is a separate being with different characteristics). 

That’s why it’s important to bring this supply of data to blocks with these differential elements. 

Now, why not transmit these variables directly to the blockchain? 

The blockchain works like this: before being able to enter a block and be accepted on the blockchain, each piece of data must go through a validation test, by means of the network members. 

Smart-contract are tools that allow to trigger an action on the blockchain, according to the information they receive. 

In this case, if all the signals are completed, the action is activated. 

But in order for the variable to get that far, we need to be able to ensure this transition from the real world to the blockchain.

This is where the oracle comes in. 

Oracles, complementary data distribution channels

The oracle will allow to connect the real world to the blockchain. 

However, an oracle is not a direct provider. It does not provide information directly.

Before that, it collects, queries, verifies and authenticates external data from several sources.

The image one must have in mind is that of a bridge or a broadcast channel. 

An oracle is, in short, a technological tool that provides variables from the real world and integrates them into smart contracts.

They act as APIs (application programming interface) giving an access point from the blockchain to the real world (and vice versa).

Oracles and their different types

In-bound oracles: they provide off-chain data from the real world to the blockchain.

Out-bound oracles: they bring blockchain data to the outside world.

Thus, in one way or another, oracles participate in the sending and secure transfer of data.

Centralized oracles 

In another register, we find centralized oracles that rely on only one data provider, and focus on only one smart contract.

and decentralized

Conversely, decentralized oracles interact with multiple data sources without being controlled by one entity. 

Other forms 

Oracles can be physical persons, trusted individuals. Imagine, for example, a group of several people, who have to attest the realization or not of an event.

In this case, we find consensus oracles (the information will be accepted according to the number of people who voted); 

Hardware oracles and software oracles: the data is processed in a database, in the cloud, or in connected objects.

This is the example of the sensor present on the soccer fields, in order to capture the weather elements.

In short, different forms that will have an impact on the consolidation of information.

Some issues related to oracles  

What would happen if one of the oracles were to be compromised? Or that the channel of diffusion had been disturbed by some event? 

One can imagine that if the oracles are trusted individuals, the risk is that one of them is no longer reliable. 

In this case, we can imagine that the person will have to leave the network.

On the blockchain level, however, the smart contract associated with this oracle is in the front line. 

The risk is still higher when it comes to centralized oracles, because it is easier to reach a single target.

Oracles in real life

In the real world, applications are diverse, especially for services that depend on variables.

Take for example, the case of agricultural insurance or insurance in general.

Oracles will be able to attest in real time, weather conditions, the reasons for a train delay…etc. 

In DeFi, we could take the example of a person who only wants to buy an asset if it reaches X price. 

With this condition that the smart contract will only set up the purchase process if price X is reached. 

The oracle will come and confirm the price X at the moment T. And the smart contract will be able to set up the purchase.

Conclusion 

Oracles are therefore interesting tools, even essential depending on the set-up of a particular technology.

They participate and allow the communication between the real world and the blockchain. 

The realization of actions will depend indirectly/directly on all the variables provided and analyzed at this level. 

Nevertheless, their protocols must be strictly established, with all the necessary security. 


 The aim of this article is above all to simplify technical concepts related to crypto-currency, in order to make them accessible to everyone. These words engage only their author. It is not intended to advise the reader on his investments.

December 2, 2022

November 18, 2022

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