There’s no end to the potential applications of blockchain and the game-changing possibilities it can enable, but the technology faces a key limitation holding back its wider adoption.
The thing is that decentralized networks live in isolation, in a world of their own, which makes it difficult for them to know what’s happening outside of it.
Blockchains can’t talk to other systems. They can’t read the news, they can’t keep up to date with the latest live scores and they don’t know what the weather is like.
In this way, blockchains can be likened to a computer that’s disconnected from the web. When a computer is offline, it cannot obtain or leverage any information that isn’t already stored on its internal hard drive. In the same way, blockchains can only access the transactional data posted on their distributed network, so they’re unable to tell you about the latest sports results, stock market movements, or weather conditions.
The isolation of blockchains severely limits their usefulness outside of their primary use case, which is cryptocurrency. If blockchain is to enable faster, automated transactions without intermediaries in traditional finance, or help to support more transparent supply chains, then it needs a reliable way to understand what’s happening outside its network.
This is where blockchain data oracles come into play. Oracles are like an internet connection for blockchains, enabling them to access and verify real-world information that comes from other systems.
They do this by acting as a trusted intermediary, sourcing data, verifying that information, and finally transmitting it to the blockchain so it can be read by on-chain smart contracts. Doing this, they open the door to many more applications, including cross-chain transactions in crypto, sports betting, decentralized insurance platforms, and many more.
How do blockchain oracles work?
Oracles are not a new concept in blockchain, and several different protocols have emerged to cater to the rapidly growing world of decentralized applications. Although the likes of ChainLink, Pyth, Band Protocol, DOS Network, and NEST Protocol each have their way of doing things, they each perform three vital tasks that are necessary to bring accurate and reliable off-chain data to blockchain-based smart contracts.
The first job they perform is data retrieval, and oracles can use various mechanisms to do this, including API calls, IoT sensors, and web scraping, to fetch real-world data from external sources.
Once the oracle fetches this data, the next job is to verify it and ensure its accuracy. Once again, oracles employ various techniques to validate the information they obtain, including cryptographic proofs, consensus mechanisms, and reputation systems. With most decentralized oracle networks, teams of validators are incentivized to ensure the accuracy of the data they obtain.
The final job is to securely transmit this verified data to blockchains in a format that can be understood by smart contracts, so they can execute predetermined actions when specified conditions are met.
Blockchain oracles today
At present, most blockchain oracles cater to decentralized finance protocols. They play a key role in enabling cross-chain transactions, making DeFi far more efficient and inclusive. By using an oracle such as ChainLink or Pyth, decentralized applications or dApps can access real-time price feeds for hundreds of different crypto assets that live on different blockchains.
For instance, decentralized exchange platforms like dYdX use oracles to list the prices and enable trading of many more crypto assets. Lending and borrowing protocols such as Curve use oracles to help determine the value of collateral deposits and liquidation thresholds, paving the way for users to obtain loans and generate interest on their capital without intermediaries. And derivatives trading platforms such as Deribit make use of oracles to obtain real-time market data for settling futures and options contracts.
More recently, data oracles have fueled the rise of tokenized real-world assets, making it possible for blockchain-based dApps such as Aurus to keep track of the latest gold price, so it can be traded in tokenized form.
One of the newest use cases for data oracles in DeFi is AI agents, which are transforming investing by automating tasks such as trading and yield farming on behalf of users. Giza Protocol’s AI agent ARMA is designed to help DeFi investors maximize their returns when providing liquidity to decentralized protocols. It makes use of data oracles to monitor numerous lending and borrowing protocols to keep track of the different yields offered by each platform. By doing this, ARMA can automatically move its investors’ funds to whatever protocol is the most profitable, in real-time, helping them to obtain maximum rewards for their yield farming activities.
Blockchain oracles in the future
In the future, we’ll likely see oracles becoming widespread in more applications, with some of the most promising being supply chain management, insurance, and risk management, NFTs, and gaming.
Supply chain processes can be enhanced with greater transparency, improved traceability, and more efficiency when they’re built on blockchain. By using data oracles to integrate real-time information regarding the origin of products, their movement, how they’re processed, the temperature they’re stored at, and so on, it becomes much easier for consumers to track the history of products and verify their quality.
In this use case, oracles obtain data from sources such as IoT sensors, RFID tags, and other tracking devices to ensure that products comply with regulations, are ethically sourced, and are correctly sourced. The same data can also help companies in terms of inventory management and optimizing their logistics processes. One example of this is Everledger, which uses blockchain and oracles to authenticate ethically-sourced diamonds.
Data oracles will also facilitate the rise of “decentralized insurance”, providing real-time data to protocols to verify claims and automate payouts. For instance, in the crop insurance business, Etherisc uses oracles to source verifiable, real-time data on weather conditions, pest infestations, and crop yields, which can trigger smart contracts to automatically pay out to farmers if the conditions of their policy are met.
There’s also flight insurance. An oracle can obtain data from flight tracking services and inform blockchains of any delays to trigger a compensation payment for passengers. Similarly, they can be used to confirm natural disasters such as flooding, enabling automatic payouts to policyholders based on the amount of rainfall an area receives.
Elsewhere, oracles have the potential to facilitate dynamic interactions between blockchain-based games and real-world events. The Sorare fantasy football game, for instance, uses oracles to fetch real-world data from soccer matches to update its player-based NFTs. Other use cases include peer-to-peer sports betting, where the winning punters can get paid the moment an oracle confirms the full-time score of a match.
Fueling blockchain automation
Data oracles are rapidly emerging as one of the key pieces of infrastructure for blockchain, allowing them to communicate and interact with the real world. In turn, this communication will support the emergence of more dynamic and versatile blockchain-based applications.
By feeding price data into DeFi applications, automating insurance-related payouts, enhancing supply chains, and enabling more dynamic games, data oracles dramatically enhance the capabilities of blockchain, paving the way for a more efficient and automated future.