What is a Blockchain Oracle?
Oracles act as the ‘internet connection’ for blockchain smart contracts, providing them with the external data required to execute more complex tasks and deliver broader functionality.
A blockchain oracle is an application that is responsible for sourcing, verifying, and transmitting real world data from off-chain sources to smart contracts operating on the blockchain. This allows smart contracts to access and utilize data beyond what is stored on the blockchain itself. Without an oracle, smart contracts would be confined to only working with onchain data, limiting their utility and functionality.
Think of the blockchain like a standalone computer. A computer by itself is a powerful tool that possesses considerable computational power, enabling it to execute a wide variety of tasks. However, its capacity to generate insights or provide solutions is limited to the data stored on its local hard drive. Connecting the computer to the internet exponentially expands its capabilities by giving it access to a wealth of data and global resources.
Oracles act as the ‘internet connection’ for blockchain smart contracts, providing them with the external data required to execute more complex tasks and deliver broader functionality.
Blockchain oracles can vary in several aspects:
- How they source data: Data can be obtained from a single source or aggregated from multiple sources.
- Oracle architecture: First-party oracle nodes are operated by the data provider, while third-party nodes are operated by an intermediary.
- Push vs. Pull design: Some oracles push data to smart contracts based on deviation and heartbeat specifications, while others pull data onchain when it is needed based on requests from smart contracts.
API3 uses a first-party oracle architecture, with a push oracle design. The data from each of these sources is aggregated natively onchain, with multiple sources used to create decentralized data feeds (dAPIs). The advantage of first-party oracle architecture is that the sources of the data and the degree of aggregation can be verified by developers onchain.
Why Do Smart Contracts Need Oracles?
Smart contracts need oracles to bridge the gap between the blockchain, which is a deterministic system, and the dynamic, real-world data and events the digital economy relies on.
Blockchains, like Bitcoin and Ethereum, operate in a deterministic manner, meaning they always produce the same outcomes when given the same initial state and input. This determinism is vital for maintaining consensus and ensuring that all nodes agree on the state of the blockchain. However, this determinism becomes a limitation when it comes to incorporating real-world data into smart contracts.
Many smart contracts need to interact with data and events from the real world. For example, a smart contract might execute based on the current exchange rate, weather conditions, stock prices, or any other information that an application requires. This data is dynamic and subject to change, making it incompatible with the deterministic nature of blockchains.
In a decentralized blockchain network, achieving consensus among nodes is crucial. All nodes must agree on the outcome of a smart contract's execution to maintain the integrity and trustworthiness of the network. If different nodes obtain different results due to external data variations, consensus would break down and ultimately undermine the decentralized nature of the blockchain.
Oracles solve this problem by acting as bridges between off-chain data sources and onchain smart contracts. Oracles take real-world data, such as price feeds, and bring it onchain in a tamper-resistant manner. This allows smart contracts to use this data without compromising the consensus mechanisms of the blockchain.
However, by bringing real-world data onchain, oracles introduce another problem, known as the Oracle Problem: how to reliably bring external, off-chain data onto a blockchain in a manner that is secure, trustworthy, and decentralized.
Oracles are Core Infrastructure for Onchain Finance
The role of oracles in DeFi goes beyond mere data provision; they serve as core infrastructure for network security and scalability. As innovative projects continue to work to improve the core infrastructure for onchain finance, API3 is setting the standard for what oracles can and should be.
As a first-party oracle solution, API3 represents the next generation of oracle services focused on data source transparency, onchain verifiability, and direct access to data without having to go through intermediaries, setting the stage for the mass adoption and scaling of onchain finance.
