What is a blockchain oracle? All you need to know

Main

• Blockchain oracles are algorithms that serve as a data communication channel between a smart contract and a source outside the network in which it is deployed.
• Oracle technology is widely used by decentralized applications in such areas as DeFi, GameFi, insurance, NFT and others.
• The largest provider of blockchain oracles is Chainlink. Band Protocol, Berry Data, Kylin Protocol, DIA and other projects also work in this segment.

What problem do blockchain oracles solve?

Most operations in decentralized applications are performed using smart contracts. For their work, they may need a variety of data from external sources. For example, to calculate the exact ratio of the price of one cryptocurrency to another during the exchange.

Data from external sources – in particular, from platforms that aggregate trading and price data from many exchanges – allows you to calculate the most “fair” price, as close as possible to the market.

However, a smart contract is unable to obtain information outside the blockchain on which it is deployed. It is here that oracles come to the rescue, performing an intermediary function between the contract and the data source it needs.

Blockchain oracles are algorithms that usually run on the nodes of a particular blockchain.

What are blockchain oracles?

Oracles are divided according to different criteria: the principle of operation, the sources of the data received and their direction, as well as the form of organization. Below are the most popular types.

Software and hardware

The first ones take data from digital sources: databases, servers, cloud storages, and broadcast it to the addressee in real time. Hardware rooms collect data using physical devices: smart sensors, chips, barcode scanners, RFID tags and so on

Incoming and outgoing

Oracles can have a specific specialization – either transmit information or receive from external sources. This may be necessary to increase the level of reliability and solve the problem of a single point of failure.

Centralized and decentralized

A centralized oracle is managed by a single operator, who usually uses it in his own application. This type of oracle was the first to appear, however, due to problems with the vulnerabilities of such a system, the crypto industry gradually switched to the standard of decentralized blockchain oracles. These are systems that combine many oracles. A group of nodes is selected from it, each oracle of which performs its own “section” of the request. The first project that implemented the principle of decentralized blockchain oracles was Chainlink.

Where are blockchain oracles used?

Today, oracles in the crypto industry are used to transmit data streams, in particular price feeds. The latter are a table with a list of price values ​​for different dates and their source. Feeds allow smart contracts to receive cryptocurrency quotes from centralized trading platforms and trading aggregators.

For example, in the blockchain oracle project called Band, as of June 2022, reference prices for 75 cryptocurrencies, and each of them has its own set of sources. For example, the price of Cosmos (ATOM) receive by aggregating quotes from CoinGecko, CryptoCompare, CoinMarketCap, Binance, Huobi Pro and Coinbase Pro.

Oracle technology is used in algorithmic stablecoins. One of the examples is Ampleforth. The price of the AMPL stablecoin is supported by a rebalancing model (Rebase). In order to maintain a 1:1 dollar peg, the number of stablecoins in holders’ wallets is constantly changing in proportion to the market price of AMPL.

To do this, Chainlink oracles supply aggregated data on the price of the AMPL/USD trading pair from several aggregators to the Ampleforth protocol. In addition, the oracles also feed the protocol the current value of the US CPI obtained from official sources, which allows for dollar inflation to be taken into account when rebalancing.

Data sources are not limited to applications related to the crypto industry. Depending on the purpose of the program, where they are used, oracles can be connected to a source that provides, for example, statistics about the weather or the consumer price index in a particular country.

What other features do blockchain oracles have?

Oracles can do more than just provide quotes. In Chainlink, it is possible to have a Verifiable Randomness Function (VRF) in application contracts where randomness is important, such as in blockchain games.

The Polychain Monsters project uses the VRF method to determine the contents of loot boxes, as well as to randomize the properties of the NFT token and choose the winner in airdrops.

Also, games use VRF to create an exciting and unpredictable gameplay, in particular for random selection of the properties of game characters. IN Aavegotchi the user collects valuable crystals on the game map and participates in various mini-games with the help of “NFT ghosts” (Aavegotchi). When a member receives an Aavegotchi at the start of a game, they are assigned a random level via VRF.

What projects are developing blockchain oracles?

Chainlink is a recognized leader in the decentralized oracle market. Its ecosystem has more than 1300 projects in the DeFi, NFT and Game-Fi sectors. Chainlink does not have its own network: the project deploys nodes in different blockchains, the applications in which it serves. Chainlink oracles operate on Solana, Ethereum and EVM compatible networks, including BNB Chain, Arbitrum, Optimism, Polygon, Avalanche and Fantom.

You can also highlight the Band Protocol, which has about 80 integrations. Unlike Chainlink, the project runs on its own BandChain blockchain created using the Cosmos SDK. Band also develops tools for WebAssembly developers that allow you to create oracles. BandChain is managed by a network of validators. Works with applications on Celo, Oasis and Cronos networks. The native coin of the project is BAND.

Also major suppliers of oracles are:

• Berry Data is an oracle system in the BNB Chain network. When requesting off-chain data, Berry Data oracle operators compete to transfer data to a special “data bank” (Berry data bank) available to all applications on BNB Chain. In April 2022, there were about 170 integrations.
• DIA (Decentralized Information Asset) is a cross-chain compatible open source information platform that provides access to verified market data for decentralized applications. The project has its own DIA management token.
• Kylin Network is a decentralized oracle and data infrastructure platform for DeFi and Web3 based on the Polkadot Substrate framework.