Connecting the Dots: How Blockchain Oracles Make dApps a Reality
Blockchain technology is a revolutionary tech that has the potential to change the way we store and exchange information and value. However, it operates within a self-contained environment and lacks a connection to the real world. This is where blockchain oracles come in.
A blockchain oracle is a third-party service that acts as a bridge between the blockchain and real-world data sources, providing the information needed for smart contracts to execute automatically. A smart contract is a self-executing contract coded with the terms of the agreement, which can automatically enforce and fulfil the contract when specific conditions are met. However, they require an oracle to access information outside the blockchain network.
For instance, consider a crop insurance system on the blockchain. Farmers can purchase insurance for their crops and if the weather conditions, such as temperature or rainfall, are not favourable, the oracle can provide this data to the smart contract, triggering a payout to the farmer automatically. Another example could be a supply chain management system where the oracle provides real-time information on the delivery status of goods, automatically triggering payments to the suppliers once the goods have been received.
In the world of finance, a smart contract that pays out a reward based on a specific stock reaching a certain price can only execute the payout if it has access to live stock prices. An oracle must provide this data to the smart contract, allowing it to automatically execute.
Oracles can obtain information from various sources such as APIs, web services, and traditional data sources. However, they must be trusted to provide accurate information, as false data can lead to incorrect execution of smart contracts.
The implementation of blockchain oracle solutions has faced several challenges in the real world, including data tampering, centralisation, scalability, and security breaches. Centralisation creates a single point of failure and can result in the loss of trust and the collapse of the entire system. Scalability is also a challenge as the increasing popularity of blockchain technology puts pressure on oracle solutions to handle large amounts of data. Additionally, security breaches are a major concern for blockchain oracle solutions as they handle sensitive information and are often targeted by malicious actors. Interoperability of oracles between different blockchain systems has also been a challenge, as each new blockchain that launches may use different data formats and protocols to access real-world information.
To address these challenges, several oracle solutions have emerged in the market, such as Chainlink, Band Protocol, API3, Supra Oracles, Ocean Protocol, and more. These solutions offer different approaches to connecting the blockchain to the real world, with unique features such as fast and scalable performance (Band Protocol), increased transparency of API feeds (API3), and leveraging AI (Ocean Protocol). The choice of an oracle solution often depends on factors such as interoperability and the specific needs of the user. For example, Chainlink is an Ethereum-based oracle, while Band Protocol is focusing on an interoperable solution on the COSMOS chain. Supra Oracles are the newest of these solutions and aim to tackle the lag in finality while remaining interoperable and scalable. Then there’s QED protocol that boasts some of the fastest finality rates, a valuable feature for protocols that require information quickly and accurately such as trading platforms.
Nearly every decentralised application (dApp) in the world will need a reliable and consistent source of real-world data to work effectively. Blockchain oracles play a crucial role in providing this data and enabling smart contracts to interact with the real world. Despite the challenges faced by oracle solutions, such as data tampering, centralisation, scalability, and security breaches, the market has seen significant growth in this area with new and innovative projects entering the space. In the end, the successful implementation of blockchain oracles will lead to increased trust and efficiency in the deployment of smart contracts, ultimately moving us into a more trustless and decentralised world.
