Oracles are like bridges that allow blockchain smart contracts to connect with real-world data and systems outside of the blockchain. This is important because smart contracts on their own cannot access things happening off the blockchain.
Imagine Alice and Bob wanted to bet on a sports game. Alice thinks Team A will win, so she bets $20. Bob thinks Team B will win, so he bets $20. Their $40 total goes into a smart contract that will pay all the money to whoever made the right bet after the game.
But how does this smart contract know who won the game? It needs an oracle to securely deliver the real sports results from off the blockchain so it can determine if Alice or Bob gets paid
Blockchains and smart contracts purposely isolate themselves from external systems for security reasons. This protects user transactions and prevents cheating. However, most useful smart contracts need to react to real-world events.
That’s why we need oracles — to safely connect smart contracts to things happening outside the blockchain. For example, in finance, smart contracts may need real asset price data. For insurance, weather reports are important. Gaming uses randomness, supply chain uses sensors, and governments verify identities.
So oracles act like a bridge, allowing advanced smart contracts that mix on-chain code with off-chain data. We call these “hybrid smart contracts.”
But since oracle data decides if smart contracts pay out properly, the oracle mechanism must be extremely secure and reliable. Bad data could cause unexpected results.
In summary, oracles solve a fundamental limitation of smart contracts — their walled-off nature from external systems. By bridging on-chain and off-chain environments, they greatly expand the types of decentralized applications possible on blockchains today. Major industries can now build hybrid smart contracts to connect with real-world data.
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