Blockchain oracles: A quick explanation on what they are

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A seemingly hot topic but is still kind of niche this year has been on blockchain oracles. You may have heard of them, or maybe not yet as they are quite focused on the cryptocurrency space. But, just what is a blockchain oracle?

In the most simplest terms, a blockchain is just a database. However, there are key areas that make it completely different than a database. For one, blockchains are global public ledgers, available to anyone in the world, that anyone can participate in, or write and append to it. It stores information, when linked together, forming an immutable chain of information (transactions), hence the name, blockchain. Blockchains are decentralized and open source, and with proof-of-work, blockchains are irreversible.

What is a blockchain oracle?

Now that you know what a blockchain is, let's take a look at an oracle. In the classic sense of the word, an oracle is someone or something, that can provide insight or information, about the future. This is commonly used in predictions. But in modern day information technology, oracles are referred to as machine learning technology that is able to take data and feed it to consumers who will then make use of it; prediction markets are a great example use case for an oracle. So what is a blockchain oracle? It's combining both the public immutable blockchain data and modern oracle information and making it available to other blockchains.

Blockchains are currently not in sync

One of the issues with blockchains is that they are not in sync with one another. Each blockchain is a silo, in it's own network. For example, the Bitcoin blockchain can't talk to the Ethereum blockchain, and so on. This is where a blockchain oracle will come in. If each respective blockchain integrates a blockchain oracle to their protocol, they will be able to "talk" to each other and share real-time data such as price feeds, and other information, all on the blockchain.

For a quick explainer on what are blockchain oracles, you can watch this video too.

Oracles in smart contracts

One of the major benefits to using an oracle is when it's applied to a smart contract. Smart contracts are conditional agreements which are used in cryptocurrency networks like Ethereum, where they are able to execute these agreements on the network automatically. With blockchain oracles being used in smart contract networks like ETH, they are able to take external information feeds about real-world data and apply them to smart contracts.

An example of a blockchain oracle

There are a few cryptocurrency projects working on blockchain oracles, but one of the bigger well known ones in Chainlink, which is a decentralized oracle network that provides real-world data to smart contracts on popular networks like AAVE, Synthetic, Yearn Finance, Celsius, Ampleforth, and others.

Chainlink was created to incentivize data providers (oracles) to be the bridge between blockchains and external data sources. Oracles are incentivized to provide accurate data by being rewarded with the LINK token. Oracles that provide inaccurate data and get a bad reputation can be punished by the network.

Chainlink architecture via Kaleido.io

There is a lot of space to improve

Blockchain oracles aren't without failure. It's still a new and improving ecosystem within the cryptocurrency space. Just a few months ago the Chainlink network was attacked, exploiting network nodes costing in total at least 700 ETH to those node operators.

In addition to malicious exploits, blockchain oracles aren't perfect. At this time, there is no way to detect inaccurate data without some sort of human intervention. For example, if an oracle node published data that it was a cloudy day in my local area, and another published data that it was sunny, who is to say that one is right and the other is wrong? What if it was both cloudy, then sunny, then cloudy again? It's impossible to know if inaccurate data is indeed bad or malicious, without humans reviewing the data in detail and then later punishing those node operators that are supplying bad data. In addition, that data may not be bad but may be conflicting or controversial.

Currently in Chainlink, all of the metrics to know if a oracle node operator is "good" or "bad" (reputation based) is by using all automated components like the number of transactions, job completion ratio, gas prices, and response times.

Conclusion

At this time, the benefits outweigh all of perceived drawbacks. Even though there is room for improvement, the fact that we can now have decentralized data feeds that sync across blockchains is an amazing accomplishment. Blockchains itself are just over ten years old. We have a long ways to go when it comes to cryptocurrency and decentralized networks, and we should continue improving and making it better.

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