Blockchains and Oracles: A Primer

This is the first blog post in a series that explains some of what happens under the hood when we want to rely on information that is outside a blockchain.

As decentralized finance grows we’ve seen an explosion in the number of companies that use smart contracts in their business models. Business logic that is deployed on top of a blockchain now governs an increasing number of assets and transactions. Some of that logic, however, depends on receiving information from off-chain sources, such as share and commodities prices. But how can we know if this data is reliable? To have a useful blockchain-based application, this app has to use an oracle to collect external data.

A bit of background

When Satoshi Nakamoto invented blockchain technology, he solved a fundamentally difficult problem. His design ensured information validity between multiple parties that don’t trust each other and don’t communicate over secure channels.

The way that Bitcoin and other subsequent blockchains solved this problem was through the use of public key cryptography when constructing transactions. The user that sends a transaction defines the conditions for accessing the money transferred in the OPCODES that construct the transaction. If one can display the possession of the right key they have a legitimate claim to the funds that are…