December 11, 2023

What are blockchain oracles?

What are blockchain oracles?

Most DeFi projects use a new technology called “oracle”.

Oracles– Thisservices that allow smart contracts on the blockchain to receive information from external sources.

Oracles provide data to smart contractswhich are not stored on the blockchain, most often – information about the price of an asset in real time. Although oracles themselves do not contain data, they are layers that validate data and send it to a smart contract.

At the moment, companies working in the fielddecentralized finance, use oracles to receive on-chain data in real time. Seven of the top 10 DeFi apps work with centralized or semi-centralized oracles that provide external data.

What are the types of oracles?

Oracles vary in source of information, information direction and level of trust.

Data sourcescan be either hardware or software.Hardware oracles collect direct physical data and convert it into digital values ​​that can be loaded into a smart contract. Software oracles obtain information from online sources. Most often, such a source is cryptocurrency exchanges.

Data directioncan be either incoming or outgoing.Incoming oracles allow the network to send information from third-party sources to the smart contract. Outbound oracles allow smart contracts to send data to external sources. 

Centralized oraclesfunction as the only partyproviding information to the smart contract. Due to the fact that one node is responsible for all data, this method is less secure and more vulnerable to hacker attacks.

On the other hand,decentralized oraclesrely on several different parties to increase the level of reliability of the data provided. 

Why do DeFi ecosystems need oracles?

Oracles – these are intermediaries who provide the DeFi ecosystem with the necessary level of trust. It is worth noting that most DeFi projects use decentralized oracles. 

TVL's rapid growth from $675 million at the start of 2020 to $7 billion in the third quarter – the most striking example of the influence of oracles on DeFi. 

Hybrid DeFi protocols that providedecentralized networks and eliminating volatility work by connecting the oracle to traditional financial instruments, especially those pegged to the US dollar.

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