Both blockchains and smart contracts solve various problems from the centralized world. However, blockchains still cannot access important data from the outside world. In some protocols, smart contracts require such data to execute certain code. This existing problem is solved very effectively by blockchain oracles. Blockchain oracles are responsible for sending, executing and verifying data they receive from centralized sources. They then transmit it to smart contracts. We have already mentioned Blockchain Oracles in a previous lesson here.
There are several oracles on the cryptocurrency market. Which one is the best? How do they differ? Before we get to our top 10 oracles, let us look at their types and how they work.
What are oracles, and how do they collect data?
Oracles are intermediaries between the world of cryptocurrencies and the outside world. Their purpose is to collect data and transfer it between smart contracts and the off-chain source.
Blockchain Oracles collect data depending on what information developers need to feed into the network. The data can come from hardware or software sources. For example, if a particular oracle only tracks information from the network, it collects data from APIs on centralized cryptocurrency exchanges. In contrast, hardware oracles can collect data from physical devices, such as a thermostat or QR scanners.
A unique feature of such oracles is that they rely on multiple node operators. This is all to querying, validating and transferring data. Since the data received from the oracle has to go through multiple validators, the likelihood of errors is reduced.
The information thus verified is then transmitted to smart contracts in encrypted messages. If the smart contract reads them successfully, it verifies them in the blockchain.
Blockchain Oracles – types
Despite the fact that we have many types of dispatch, they all have a similar goal – the secure transmission of information from on-chain and off-chain sources. However, they do not all do this in the same way. Here are some types of oracles:
Inbound and outbound oracles. “Inbound” and “outbound” here refer to the direction of data flow in the oracle. Inbound oracles feed information into the blockchain, while outbound oracles forward data from the blockchain to an external source.
Hardware and software oracles. They refer to oracle data sources. The hardware relies on information from physical devices, while the software collects data from the network.
Decentralized and centralized oracles. Centralized oracles rely on a single, trusted source for their feed data. They can be efficient, but pose a threat to blockchains. Decentralized oracles feed data to the chain without creating a single point of failure. They use consensus mechanisms, token incentives or multiple node operators to submit data to the blockchain in a trusted way.
Computer-aided oracles. They are a relatively new creation on the market. They focus on the transfer of complex data via the blockchain. The calculations performed by this type of oracle are often very complex and complicated.
Human oracles. Yes, people can also provide data to oracles. For example, meteorologists can provide data to intelligent contract if they want to provide weather information.
Contract-specific oracles. That is, oracles that have a unique use case. If the parameters of the intelligent contract-specific oracle are fulfilled, its task is accomplished.
The most popular blockchain oracles
Chainlink: Still the largest blockchain oracle, dominating the DeFi sector. Offers a wide range of off-chain data for applications running on multiple blockchains such as Ethereum, BNB Chain and Avalanche. It has introduced the Cross-Chain Interoperability Protocol (CCIP), enabling dApps to implement cross-chain functionality.
Band Protocol: A decentralised oracle running on the Cosmos ecosystem, enabling the delivery of tamper-resistant data through the Delegated Proof of Stake (DPoS) mechanism. Band provides interoperability and is more cost-effective.
Universal Market Access (UMA): Deals with the creation of synthetic assets and smart financial contracts on Ethereum. Optimistic UMA oracles are widely used in DeFi products such as prediction markets and financial options.
Decentralised Information Asset (DIA): Open-source oracle providing validated data, particularly popular in the DeFi sector. Allows the creation of customised data feeds through aggregation from various sources, including central and decentralised exchanges.
API3: Offers decentralised APIs (dAPIs) that directly integrate data from external sources without intermediaries. API3 is distinguished by its unique Airnode solution, providing easy API integration with blockchain applications.
XYO Network: an Ethereum-based oracle that uses anonymous, decentralised devices to acquire accurate geospatial data, particularly useful for applications requiring location confirmation.
iExec RLC: A platform offering a marketplace for decentralised computing resources, dedicated to the DeFi sector. iExec enables dApps to access off-chain computing power, similar to cloud services like AWS.
Tellor: A decentralised oracle providing secure off-chain data for smart contracts, built on Ethereum. It uses a system of reporters that provide data, and users pay for this data in TRB tokens.
Nest Protocol: A decentralised oracle on Ethereum, based on a quotation mining mechanism that allows flexible data scripting. It mainly focuses on providing market prices in a transparent and tamper-proof manner.
DOS Network: a decentralised Layer 2 oracle, supporting multiple major blockchain networks, providing off-chain data in a fast and scalable manner.
Beyond this, the choice depends on the individual needs and preferences of developers and users. Each of these oracles has its own unique features, providing a variety of solutions for different applications.
Summary
Blockchain oracles play a key role in the development of blockchain technology. The off-chain data they provide helps countless industries around the world. We also know with certainty that blockchains would be limited in their capabilities without oracles.
With the development of Web3, DeFi and other decentralized applications, it will be great to see Oracle discover its full potential.
