Understanding Blockchain Oracle- Part I

By Ruma | Blockchains Projects | 18 Jul 2020

If you are from a technical background you must have heard about the term Oracle. The Oracle is a database which can store enormous data. Many big organizations use this database for their data warehouse and other data-related projects.

But how this term Oracle is linked to Blockchain. In this article, we will discuss Blockchain Oracle.

In Blockchain, the transaction generation, validation, processing everything that happens inside the blockchain system. It doesn’t communicate with the outside world and their operations are limited to within the network itself. Smart contracts take data as input from blockchain transactions and perform predefined tasks. It doesn’t communicate with the external system. The non-existence of to and fro data communication between the blockchain system and the external world will limit the progress of smart contracts.

To become an alternative to the traditional system it has to communicate with the outer world data. Thus to serve this purpose Blockchain oracle came into the picture. With the use of blockchain oracle smart contracts as well as Blockchain technology can be encouraged to be adopted by the common mass.

What is a blockchain oracle?

Blockchain oracles serve as bridges between blockchains and the outside world which will feed external information into the smart contract. This external data source is either from some database, servers, hardware, or anything on the internet.

Apart from serving as an external data source, it will be responsible for data authentication before sending it to the blockchain network. The data will then be pass as an input to a smart contract upon invoking.

Famous blockchain oracle projects: ChainLink, Band Protocol

Different Blockchain Oracles

Blockchain oracles can be classified depending on several different qualities.

  1. Source of data
  • Software- Designed to transmit data from online systems like servers, databases, etc to the Blockchain. These types of oracles are popular and quite common due to their ability to transfer real-time data like exchange rates, digital asset prices, or real-time flight information.
  • Hardware- Designed to transmit information from the physical world i.e electronic sensors, barcode scanners, and other information reading devices to smart contracts.
  1. Information flow direction
  • Inbound- Send data from external sources systems to smart contracts.
  • Outbound- Transmit the information from smart contracts to the external world.
  1. Trust
  • Centralized-Maintained and controlled by a single authority. Serves as a single source of information.
  • Decentralized-These are the most suited and reliable oracles for blockchain. It is not dependent upon a single data source, data can be easily validated from multiple oracles.
  1. Contract-specific oracles

As the name implies these oracles are designed to be used by a single smart contract. These are quite flexible and are developed from scratch to fulfill specific business demands. These oracles are very time-consuming and expensive to maintain.

  1. Human oracles

A normal human being can also serve as an oracle if they are having enough knowledge and skills of a particular domain. Identity verification of an individual is done through cryptography. These individuals can use their skill sets in checking the data authentication which is coming from various sources and transmit it to the smart contract.

Depending upon the structural design an oracle can fall into multiple categories.

How important are oracles?

The traditional system cannot be changed overnight, also it cannot discard its existing organizational data. Currently, the blockchain transactions are limited to within the network. It is not capable of to and fro data transmission between the external systems and the smart contracts which limit its capacity to be integrated into the existing data sources. To broaden its boundary the network first needs to start accepting data from external systems. Developers and researchers need to find a way to use this legacy data into the blockchain architecture.

The Oracle Problem

Since the oracles and blockchain system both have structural as well as a fundamental difference which gives rise to many design challenges known as the Oracle problem.

Oracles are a single source of data, unlike blockchain which is decentralized and hence imposes concern over data authenticity. Since the smart contracts will execute decisions based on the data provided by oracles so if the oracle is compromised, the smart contract will not produce the expected output.

Another challenge is to trust these external data sources because these are third-party services and are not a part of the blockchain consensus mechanism. Hence these are not bound to adhere to the security mechanism which a blockchain follows.

Oracles are also prone to Man-in-the-middle attacks where a hacker tries to alter the data which is coming from the oracle source. An incorrect input to the smart contract will produce a weird outcome. 

However, these issues are not something that cannot be overcome. A powerful data standardization mechanism that abides the underlying consensus method can help resolve the issue. Certainly, the design of a secure, reliable, and trustworthy oracles system will be helpful to gain mass adoption and success of smart contracts shortly.


Resources: Binance academy

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Blockchain researcher and content writer | Voice| altcoinbuzz.io| writer.io | [email protected] | Twitter: @rumadas123 | Telegram: @RumaDas

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