Oracles - Bring the Real World to the Blockchain

A Blockchain can only handle the information within it. However, there are smart contracts that make transactions using data that comes from abroad to determine the outcome of those transactions. So how is this information fed to the Blockchain?

What are Blockchain Oracles?

Oracles are third-party services that provide information external to the Blockchain. They act as bridges between the chain of blocks and the outside world.

The advances in smart contracts bring the need to have external data so that they can be carried out. This need is suppressed by the existence of oracles that bring data from outside into the network and thus contracts can act based on that data. So, oracles are a mechanism that increases the potential and the areas in which smart contracts can operate.

All types of data can be transmitted - the result of an election or a sporting event, the measurement of a temperature or the successful completion of a payment or transaction. Oracles can be used to send information into or out of the blockchain. This data transmission will necessarily use network resources - such as bandwidth or computing power.

How can they be used?

The oracles can be used in several types of smart contracts: such as the value of assets for confirmation of purchase or sale of them (as already used in the DeFi system), or in the resolution of bets. Let's see an example of a bet between two friends.

Maria and Manuel made a bet on who will be the winner of the next edition of the World Cup. Maria believes it will be her Brazil. Manuel is convinced that Portugal will be the winning team. After agreeing the amount they are going to bet, they deliver the defined amounts to a smart contract, which will release the total amount to anyone who wins the bet based on the results of the games.

The smart contract cannot interact with information outside the blockchain. So you need an oracle to give you the necessary information - in our example, the championship results. When the games are over, the smart contract will consult an oracle to find out which team won the championship and to address the funds to the winner of the bet, according to the result.

If the oracles didn't send that data, the smart contract would never know who the new champion would be. And the funds would be blocked.

What types of oracles are there?

The oracles can be classified according to 3 categories:

• Information source - the information is obtained by software or hardware. The software type obtains mainly data from the Internet, while the hardware type will be read through sensors that transform data from the physical world into electronic data.
• Information direction - oracles can provide two-way information into or out of the blockchain.
• Trust - oracles can be centralized if they are controlled by a single entity or decentralized if they receive information from multiple sources.

What uses can the Oracles have?

• DeFi - The combination of the world of finance and smart contracts created the era of Decentralized Finance - DeFi. The data that inform the platforms of the prices of the traded assets can be obtained through oracles.
• Insurance - The biggest challenge in the insurance world is fraud. The oracles can provide data transparently and securely so that using the blockchain decentralization can solve this problem.
• Shipment of orders or products - It is possible to create a system that replaces centralized GPS systems, using the oracles so that DApps can track shipments of orders.

Interoperability

Interoperability is defined as the ability that different systems have to communicate and exchange information with each other effectively. This characteristic is vital to make decentralized technologies capable of interacting with current systems - financial or otherwise. If the different chains are able to communicate with each other, we can create an ecosystem of different chains that will improve and eventually replace the current mechanisms. To achieve this, it is necessary that the mechanisms that link the various systems are robust and transparent.

If we have sources feeding data that influence smart contract resolution, how can we trust them?

The oracles provide information that will dictate the results of smart contracts. Thus, it is necessary that they are healthy so as not to compromise the entire system. However, oracles are not part of the main consensus of the block chain and, consequently, are not safeguarded by the security mechanisms that blockchains offer.

There is a conflict between the trust necessary to use the data provided by external sources and the proposal to eliminate the trust from the blockchain. However, this conflict has been diminished through some ways used to maintain the credibility of the information obtained by oracles:

• Multiple data sources - an oracle can receive data from several sources in order to compare the information received by the various sources and thus decrease the likelihood of having wrong information.
• Multiple oracles - similarly, if a smart contract receives data from multiple oracles it can eliminate the problem of having a single point of failure.
• Incentive Mechanisms - One way to get sources to pass on the right information is to create mechanisms that reward them for doing so or that severely punish them when they pass the wrong data.

Blockchains oracles are vitally important for blockchains to be adopted by a larger percentage of the population each time and to increase their capabilities. They allow the chains of blocks to be free of themselves and begin to encompass an increasingly larger portion of our daily lives.

As they are a critical component of the system, it is necessary to use several mechanisms to increase the credibility of the information provided. For this, the oracles must also follow the principles of the blockchain: be implemented in a safe, decentralized and without the need for trust. In this way, they will contribute to decentralized technologies continue to grow.