Oracle

A blockchain oracle is any device or entity that connects a blockchain with off-chain data

Let’s dive into this statement briefly, as understanding what an Oracle helps you know how certain aspects of a blockchain & decentralization work. It appears to be a concept few understand clearly.

A real-world example, if you were purchasing a house with cryptocurrency, a simple, smart contract might be drafted for sale. It would say, “if person A sends the required funds to person B, then the deed for the house is transferred from person B to person A.” Once the smart contract conditions are met, it is irreversibly executed according to its coded programming. There is no need to rely on traditional third parties to initiate or execute the contract.

However, there needs to be a way for blockchains and on-chain smart contracts to use external, off-chain data for smart contracts to have real-world applications. In the above example of a real estate transaction, off-chain data might be proof of successful payment or receipt of the deed. And as blockchains are self-contained systems, this is where oracles come into play.

There are many cases where outside data needs to be communicated to the closed blockchain system — particularly when smart contracts are connected to real-world events. Crypto oracles query, verify, and authenticate external data and then relay it to the closed system. That authenticated data would then be used to validate a smart contract.

Decentralized Oracles

Decentralized oracles try to achieve trustlessness and deterministic results that rely on cause-and-effect rather than individual relationships. They seek to achieve these results in the same way a blockchain network does: by distributing trust among many network participants. By leveraging many different data sources, and implementing an oracle system that isn’t controlled by a single entity, decentralized oracle networks have the potential to provide an increased level of security and fairness to smart contracts.

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