What is a blockchain oracle?

Blockchain oracles are algorithms that serve as a data transfer channel between a smart contract and a source outside the network in which it is deployed. Why is it important? How does it work? Let’s see!

Oracle technology is widely used in decentralized applications such as DeFi, GameFi, insurance, NFT and others.

The largest provider of blockchain oracles is Chainlink. Band Protocol, Berry Data, Kylin Protocol, DIA and other projects also work in this segment.

What problem do blockchain oracles solve?

Smart contracts are used for the majority of operations in decentralized applications. They may require a variety of data from external sources in order to function properly. To calculate the exact ratio of the price of one cryptocurrency to another when exchanging, for example.

Data from external sources allow us to calculate the most “fair” price, as close to the market as possible.

Blockchain oracles are algorithms that typically operate on the basis of a specific blockchain node.

What blockchain oracles are there?

Oracles are classified based on several criteria, including the work principle, the sources of data received and their direction, and the organizational structure. The most common types are shown here.

Software and hardware
The first ones take data from digital sources such as databases, servers, cloud storage, and broadcast it to the addressee in real time. Hardware collects data using physical devices such as smart sensors, chips, barcode scanners, RFID tags, and so on.

Inbound and outbound
Oracles may specialize in either transmitting or receiving information from external sources. This may be necessary to improve reliability and eliminate the problem of a single point of failure.

Centralized and decentralized

A centralized oracle is managed by a single operator, who typically uses it in his own application. This type of oracle was the first to appear; however, due to issues with such a system’s vulnerabilities, the crypto industry gradually shifted to the standard of decentralized blockchain oracles. These are systems that combine multiple oracles. It is divided into groups of nodes, with each oracle performing its own “section” of the query. Chainlink was the first project to implement the principle of decentralized blockchain oracles.

Contract-oriented
A time-consuming and costly method in which a separate oracle serves a specific smart contract. If you need to deploy multiple smart contracts, you must create an equal number of oracles.

Cross-chain
Services designed to transfer data between different blocks. Resolve the issue of network incompatibility. They can be useful for decentralized applications that use cross-chain operations, such as the transfer of one crypto asset to another.

Compute-enabled
Special oracles which perform resource-intensive calculations that are impractical to perform in the blockchain due to technical and financial constraints.

Where are blockchain oracles used?

Oracles are now used in the cryptocurrency industry to transmit data streams, specifically price feeds. Price feeds are tables that contain a list of price values and their sources for various dates. Feeds enable smart contracts to receive cryptocurrency quotes from centralized trading platforms and trading aggregators..

For example, in a project for blockchain oracles called Band, as of June 2022, reference prices for 75 cryptocurrencies are supported, and each of them has its own set of sources. For example, the Cosmos (ATOM) price is obtained by aggregating quotes from CoinGecko, CryptoCompare, CoinMarketCap, Binance, Huobi Pro and Coinbase Pro.

Oracle technology is used in algorithmic stablecoins. One example is Ampleforth is one example. The Rebase model supports the price of the stable AMPL coin. To maintain the 1:1 peg to the dollar, the number of stablecoins in holders’ wallets is constantly changing in proportion to the market price of AMPL.

Chainlink oracles provide aggregated data on the price of the AMPL/USD trading pair from several aggregators to the Ampleforth protocol to accomplish this. Furthermore, the oracles send to the protocol the current value of the consumer price index in the United States, as obtained from official sources, allowing us to account for dollar inflation when rebalancing.

Data sources are not limited to applications in the cryptocurrency industry. Oracles can be linked to a source that provides, for example, weather statistics or the consumer price index in a specific country, depending on the purpose of the program and where they are used.

What other functions do blockchain oracles have?

Oracles can provide more than just quotes. In Chainlink, it is possible to obtain a function for Virtual routing and forwarding (VRF) in application contracts where a random result is important, such as in blockchain games.

The Polychain Monsters project employs the VRF method to determine the contents of lightboxes, as well as to randomize the properties of the NFT token and select the winner for airdrops.

VRF is also used in games to create exciting and unpredictable gameplay, particularly in the random selection of game character properties. In Aavegotchi, the user collects valuable crystals on the game map and participates in various mini-games with the assistance of “NFT ghosts” (Aavegotchi). When a participant receives Aavegotchi at the start of the game, he is assigned a random level using VRF.

What projects can develop blockchain oracles?

Chainlink is a recognized leader in the decentralized oracle market. Its ecosystem includes more than 1300 projects in the DeFi, NFT and Game-Fi sectors. Chainlink does not have its own network; instead, it deploys nodes in the blockchains and applications that it serves. Chainlink oracles work in Solana, Ethereum and EVM-compatible networks, including BNB Chain, Arbitrum, Optimism, Polygon, Avalanche and Fantom.

You can also highlight the Band Protocol, which has about 80 integrations. Unlike Chainlink, the project runs on its own BandChain blockchain, which was built with the Cosmos SDK. Band is also working on tools for Web Assembly developers that will allow them to create Oracles. A network of validators governs the BandChain. Works with applications in the Celo, Oasis, and Cronos networks. BAND is the project’s native coin.

Also , major suppliers of oracles are:

• Berry Data
  It is the oracle system in the BNB Chain network. When requesting off-chain data, Berry Data oracle operators compete for data transfer to a special “data bank” (Berry data bank), which is available for all applications on the BNB Chain. In April 2022, there were about 170 integrations
• DIA (Decentralized Information Asset)
  It is a cross-blockchain-compatible open source information platform that provides access to verified market data for decentralized applications. The project has its own DIA management token.
• Kylin Network
  Based on the Polkadot Substrate framework, it is a decentralized oracle and platform with a data infrastructure for Delphi and Web 3.

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