Understanding Oracle Networks
If you remember the Matrix movies and one of the main characters, the Oracle was a connection between the human and machine world. Similarly, oracle networks connect real-world data and blockchain contracts. Smart contracts can be executed with off-chain data only by using an oracle as middleware. “Understanding Oracle Networks” will introduce you to this world of oracles and help you to understand oracle networks better.
Why Do We Need Oracle Networks?
Providing access to existing data sources, decentralized oracle networks (DONs) enable the creation of hybrid smart contracts, combining on-chain code (stored on the blockchain) code and off-chain infrastructure (external to the blockchain).
The need for oracles emerged from the limitations of smart contracts: these computer programs that run on predetermined conditions cannot interact with data or systems existing outside the blockchain. However, bridging the two environments is crucial for many use cases of smart contracts. For example, DeFi (Decentralized Finance) and dApps (Decentralized Applications) as they require access to off-chain data.
Types of Oracles
There are several recognized types of DONs that serve different purposes. Let’s briefly explore the different types of oracles.
Input or inbound oracles are recognized as the most widely used oracle type in the world.
This oracle type retrieves data from real-world (off-chain) sources and submits it to a blockchain network for smart contract consumption.
As the name suggests, output or outbound oracles are the opposite of input oracles.
This oracle type allows smart contracts to send commands off-chain, triggering execution of certain actions. Unlocking a scooter once a rental payment has been made is one example.
These oracles read and write information between different blockchains.
Cross-chain oracles also enable interoperability between blockchains (e.g., using data on one blockchain to prompt an action on another).
Gaining in popularity, compute-enabled oracles are a new breed of DONs that enable certain calculations that blockchain contracts cannot perform.
Use Cases of Oracles
Understanding oracle networks means realizing the vitality to the extensive use of smart contracts. Below, we will look at the main use cases of blockchain oracles.
DeFi is a rising, thriving alternative to traditional banking, and oracles, the industry’s backbone. To make it more comprehensive, DeFi requires oracle networks to access real-world financial data about various assets and markets.
NFTs and Gaming
Compute-enabled oracles are essential for developers introducing entropy into on-chain gaming and NFTs. These oracles enable outputs that are hard to predict, helping to create more engaging and unpredictable gaming experiences.
- Read: What are NFTs?
Insurance smart contracts use input and output oracles.
Inbound oracles are mainly used in legal data, web APIs (Application Programming Interfaces), satellite imagery, and other cases. Outbound oracles can provide insurance smart contracts to enable payouts on claims using blockchains or traditional payment networks.
Cross-chain oracles offer enterprises a middleware to quickly and securely connect their backend systems to any blockchain network.
The World’s Most Widely Used Oracle Network
The most widely recognized oracle network, Chainlink introduces a decentralized metalayer of oracle networks allowing smart contracts to seamlessly use and create a broad range of decentralized services enabling fast and efficient dApp development and cross-chain functionality.
The network uses extra secure hardware that eliminates potential reliability issues.
Decentralized oracle networks enhance and extend the capabilities of smart contracts in a secure and flexible way, having become an integral part of the crypto economy.
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