Blockchain Oracles, Explained

Blockchain oracles sound like something from ancient Greek mythology, and in a way, they function in a similar role. In ancient stories, people didn’t have enough information to make decisions and turned to oracles for information beyond their understanding.

In the same way, Blockchains like those of Bitcoin and Ethereum, do not have ready access to information outside of the chain, and so there is no direct way to validate the conditions that smart contracts are based on. An oracle is, simply put, a translator for information provided by an outside platform.

Oracles provide the necessary data to trigger smart contracts to execute when the original terms of the contract are met. These conditions could be anything associated with the smart contract - temperature, payment completion, price changes, etc. These oracles are the only way for smart contracts to interact with data outside of the Blockchain environment.

Oracles are radically important. Just like the ancient stories could never have occurred without proper external information, smart contracts cannot function without some data source. Without access to these sources of information, use cases for smart contracts drop to just a tiny fraction of their potential.

However, with these systems, smart contracts have real world applications in virtually every field available. Once data hits the Blockchain, the information can be used to execute the contracts and provide use cases, which can disrupt industries across the board.

There is a fundamental difference of formats. Blockchain is deterministic, meaning that is a reflection of a specific series of events which take place one after another in sequential order - series of transactions. Accessing information outside of the chain would require data points that are not sequential, and would therefore be impossible for Blockchain to use or make sense of. This aspect of Blockchain gives it immutability, but reduces flexibility.

The off-chain world, however, is non-deterministic, meaning that there is no recording of the events in the specific sequence that they have taken place, which creates problems with transparency. Data points can be generated from and understood at any point, providing increased flexibility, but difficulty in communicating with the Blockchain.

This foundational distinction makes the two worlds incompatible with each other by default, and only the presence of an oracle can make two-way communication between them possible.

Blockchain developers at the cutting edge of new Blockchain technology are making constant progress regarding ways to make Blockchain better integrated with the outside world. Because oracles are, themselves, smart contracts, designed to interact with the Blockchain by providing necessary data, they require developers with expertise in both off-chain and decentralized fields.

The recent and profound need for external data on Blockchain has given rise to new and interesting developments in the space. For example, oracles would allow Blockchain connection to any existing API, allow payments using traditional payment networks from Blockchain, and would allow interchain connections between smart contracts and other Blockchains.

The marketplace for these highly specialized middleware software models is growing rapidly, and, as new ways to utilize Blockchain technology are being conceived of every day, the demand will only increase.

Currently, the marketplace for these types of contracts has continued to expand, and is being led by several companies that are active in developing oracles. Oraclize has been an industry leader in oracle technology. Other startups like ChainLink and Blocksense are also seeking to take market share in this area. Finally, large scale corporations (IBM and Microsoft) are seeing the potential for huge market presence and are developing these platforms now.

As the increasing number of use cases for smart contracts continues to rise, the need for new oracle structures will also rise as the structural framework that makes smart contracts possible. This will drive increasing investment and design into the market space, and new innovations will make Blockchain-to-web communication more simple and elegant.

 

One of the more likely future trends is the development of a unified, integrated platform for communication between Blockchain and the outside world. Standardized tools and interfaces make it easier for both the developers and the users of Blockchain-enabled services. That means that we’re likely to see fierce competition between multiple providers, until one, or several of them achieve widespread recognition.