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Blockchain Oracles Explained

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You have probably heard of blockchain oracles, but what are they, and why are they so Important?

Every blockchain acts as an Isolated Island and as such contains only the data that exists on that island. Everything outside is unknown and if there's no way to connect with the outside world, the island will eventually become designated, therefore irrelevant.

Here's where oracles come to play. They literally act as a bridge between an island (on-chain world) and the external world(off-chain data). Oracles are vital for blockchain to have real-life usage, otherwise, its influence and utility would be heavily reduced.

It’s important to note that a blockchain oracle is not the data source itself, but rather the layer that queries, verifies, and authenticates external data sources and then relays that information. The data transmitted by oracles comes in many forms – price information, the successful completion of a payment, or the temperature measured by a sensor.

To call data from the outside world, the smart contract has to be invoked, and network resources have to be spent. Some oracles also have the ability to not only relay information to smart contracts but to send it back to external sources.

The importance of oracle is enormous, they act as an intermediary between two worlds and if compromised can do unrepairable damage. That's why the idea of a decentralized oracle was born.

Types of Oracles

There are different types of oracles but I'll keep my focus on explaining the difference between decentralized and centralized ones.

A centralized oracle is controlled by a single entity, that is the sole provider of information for the smart contract. You can imagine the damage it can cause if being compromised. Just imagine what would happen if the oracle sends the wrong price feed to a certain smart contract? Centralized structures are naturally more prone to vulnerabilities and malicious attacks, thus making the trust part questionable.

Decentralized oracles increase the reliability of the information provided to the smart contracts, simply by not being reliant on one "truth". In practice it looks like this, smart contract queries multiple oracles to determine the truthfulness of the data. This is why a decentralized oracle is considered superior to a centralized one. It's worth noting that decentralized oracles are not 100% resistant to the attack, however, the risk of being compromised is reduced simply because there are more parties involved regarding the validation of the data.

As crypto and defi continue to evolve, it's rational to assume that in the years to come, the need for decentralized, trustless oracles will increase exponentially.

In case you haven't noticed, crypto is evolving more rapidly than any other industry out there, and it's just a matter of time when every economic activity will be stored and processed in a decentralized manner.

Fun times ahead!

Posted Using LeoFinance Beta