Knowledge base
12 mins
What are Oracles in Blockchain?

In the fast-paced world of blockchain technology, oracles are a crucial yet often misunderstood component. Imagine a world where blockchain is a self-contained universe, brimming with potential yet blind to the happenings of the external world.


Oracles in blockchain serve as the bridge between this enclosed digital domain and the vast, dynamic expanse of real-world data.

The Oracle Problem in Blockchain

The “Oracle Problem” in blockchain refers to a fundamental characteristic of a blockchain: its closed, trustless environment. While blockchains are exceptionally good at providing a secure and immutable ledger of transactions within their ecosystem, they inherently lack the ability to access or verify external information. This limitation is not a flaw but a byproduct of the very design principles that make blockchain technology secure and decentralized.

Inherent Limitations of Smart Contracts

Smart contracts, the self-executing contracts with the terms of the agreement between buyer and seller being directly written into lines of code, are confined to the blockchain. These contracts are programmed to act on data that is internal to the blockchain. However, the real world operates outside of this blockchain ecosystem.

Real-world information – such as temperature readings, stock prices, or flight delays – is beyond the blockchain's native environment. Therefore, for a smart contract to make decisions based on real-world events, an external data feed is necessary, which leads us to the Oracle Problem.

The Role of Oracles: A Solution with Its Own Problems

Oracles are third-party services that fetch data from the outside world and feed it into the blockchain to be used by smart contracts. They act as a bridge between the on-chain and off-chain worlds.

However, introducing oracles brings about new challenges, primarily related to trust and security. The decentralization and trustless nature of blockchain mean that every piece of data and every transaction within the blockchain can be verified without needing to trust a central authority. However, oracles, by nature, are external to the blockchain and often centralized, introducing a point of trust in a trustless environment.

The Trust Issue

The trust issue in the Oracle Problem is twofold:

Data Accuracy: How can we ensure that the data provided by an oracle is accurate and unaltered?

Oracle Reliability: What guarantees do we have that an oracle service will remain online and functional at all times?

These issues are critical because if the data fed into a smart contract is incorrect or tampered with, it could lead to incorrect execution of the contract, potentially leading to financial loss or other adverse outcomes.

One approach to mitigate the Oracle Problem is the use of decentralized oracles. Instead of relying on a single source of information, decentralized oracles aggregate data from multiple sources. This method increases the reliability of the data by reducing the risk associated with any single point of failure. However, even with decentralized oracles, challenges such as ensuring data integrity and consensus on data accuracy persist.

Types of Blockchain Oracles

Input Oracles

Input oracles are the most recognized type, primarily responsible for importing real-world data onto the blockchain. This data can range from asset prices in financial markets to weather conditions, playing a pivotal role in decentralized applications (dApps).

Output Oracles

Conversely, output oracles extend the blockchain's influence into the external world. They enable smart contracts to trigger real-world events, such as payments through traditional banking networks.

Cross-Chain Oracles

These oracles are vital for blockchain interoperability, allowing the seamless flow of information and assets across different blockchain ecosystems.

Consensus-based Oracles

Consensus-based oracles amalgamate data from multiple sources, using consensus algorithms to ensure accuracy and reliability, thus mitigating the risks associated with relying on a single data source.

Compute-enabled Oracles

Addressing the limitations of on-chain computations, compute-enabled oracles perform complex calculations off-chain, enhancing the efficiency and scope of smart contracts.

Hardware and Software Oracles

Hardware oracles interact with the physical world, gathering data through IoT sensors, while software oracles deal with digital data sources like APIs and databases.

Centralized vs. Decentralized Oracles

The debate between centralized and decentralized oracles centers around trust and reliability. While centralized oracles are simpler and potentially more efficient, they introduce a single point of failure. Decentralized oracles, in contrast, offer enhanced security and resilience but at the cost of complexity and, often, speed.

How Blockchain Oracles Work

Understanding how blockchain oracles work in a technical sense involves delving into the intricate processes that enable these oracles to bridge the gap between blockchain and the external world. The procedure is not just about fetching and inputting data into a blockchain; it encompasses a detailed sequence of operations that ensure data integrity, security, and relevance to the smart contracts they serve.

At the core of an oracle's functionality is its ability to source information from outside the blockchain. This information can be anything from price feeds and weather reports to transactional data from other blockchains. The crucial aspect here is the method of sourcing this data, which is usually done through various real-world interfaces and internet-based channels. Once the data is captured, the next phase of processing begins.

The processing phase is where the oracle transforms raw data into a blockchain-compatible format. This transformation is vital because the blockchain operates in a deterministic environment where inputs need to be in a specific format to ensure consistent and predictable execution of smart contracts. During this phase, oracles may perform several operations like filtering, aggregating, and validating data to make sure it's accurate and relevant.

The validation process is particularly significant in maintaining the trustworthiness of the data. Since the blockchain environment is designed to be trustless and decentralized, introducing external data poses a potential risk. To mitigate this, oracles often employ cryptographic techniques to authenticate the data source and ensure the data hasn't been tampered with during transmission. This step is crucial in preserving the integrity of the blockchain's operation.

Once the data is processed and validated, the next step is the transmission of this data onto the blockchain. This is typically done through a transaction that embeds the data into the blockchain. This transaction, like any other on the blockchain, is validated by the network's nodes and, once confirmed, becomes an immutable part of the blockchain. This immutability is key to ensuring that once the data is recorded, it cannot be altered, thus preserving the history of data inputs that have interacted with the smart contracts.

The integration of this data into the blockchain allows smart contracts to act upon it. Smart contracts are programmed to execute specific actions when certain conditions are met, and the data provided by oracles often forms these conditions. For instance, a smart contract might release funds when an oracle confirms that a particular stock price has reached a certain level.

In terms of technical architecture, oracles can be quite diverse, ranging from simple single-source data providers to complex multi-layered systems that aggregate data from multiple sources. The more advanced oracles include features like consensus mechanisms among different data providers to ensure data reliability and redundancy systems to safeguard against downtime or data source failures.

In conclusion, the inner-workings of blockchain oracles involve a sophisticated blend of data sourcing, processing, validation, and transmission. This process ensures that the data integrated into the blockchain is not only accurate and secure but also usable in a way that smart contracts can reliably act upon. The continuous evolution of oracle technology is pivotal in expanding the functionalities and applications of blockchain technology, making it an exciting area of ongoing development and innovation in the crypto space.

Decentralized Oracle Networks (DONs)

Decentralized Oracle Networks (DONs) represent a significant advancement in the realm of blockchain technology, addressing some of the core challenges posed by traditional oracles. The concept behind DONs is rooted in the principle of decentralization, a foundational aspect of blockchain technology, which aims to eliminate single points of failure and create a more resilient, trustless system.

The primary goal of a Decentralized Oracle Network is to overcome the limitations of centralized oracles, which can become vulnerable points within the blockchain ecosystem. Centralized oracles, being singular sources of data, carry risks of manipulation, failure, and downtime, which can compromise the integrity of smart contracts relying on them. In contrast, DONs aggregate data from multiple independent sources, thereby distributing trust among various participants and enhancing the reliability of the data provided to smart contracts.

Working Mechanism of DONs

In a DON, multiple oracle nodes, operated by different entities, work together to collect, validate, and deliver data to the blockchain. These nodes independently source data from the real world and then, through a consensus mechanism, agree on the accuracy of this data before it is fed into the blockchain. This process ensures that even if some nodes provide incorrect or manipulated data, the consensus mechanism filters out such discrepancies, allowing only verified and agreed-upon data to reach the blockchain.

Advantages of Decentralized Oracle Networks

  • Enhanced Security and Trust: By distributing the data sourcing and validation process across multiple nodes, DONs significantly reduce the risks associated with single points of failure.
  • Data Accuracy: The consensus mechanism employed in DONs ensures that the data used by smart contracts is the result of agreement among various nodes, which reduces the likelihood of false or manipulated data being accepted.
  • Resistance to Manipulation: These networks' decentralized nature makes it exceedingly difficult for any single entity to manipulate the data, thereby upholding the integrity of smart contracts.
  • Improved Reliability: The distributed infrastructure of DONs offers better uptime and resilience, as the failure of one or even several nodes does not cripple the network.

Challenges and Ongoing Development

While DONs mark a significant improvement over traditional oracles, they are not without challenges. Ensuring that each independent node is trustworthy and that the mechanisms for reaching consensus are robust and efficient remains an area of ongoing research and development. The complexity of managing and coordinating a network of decentralized nodes also presents technical and operational challenges.

Real-world Applications and Examples

In practice, Decentralized Oracle Networks are being increasingly adopted in various blockchain applications. For instance, Chainlink is a notable example of a DON that provides reliable data feeds for a wide range of blockchain applications, including those in decentralized finance (DeFi). These networks are crucial in scenarios where accurate, real-time data is essential for the execution of smart contracts, such as in financial services, supply chain management, and insurance.

Comparing Blockchain Oracles

When comparing the technical aspects of Chainlink and Band Protocol, two leading decentralized oracle networks, we enter a realm where intricate differences define their respective strengths and use cases in the blockchain ecosystem.

Chainlink, a name synonymous with reliability in the decentralized finance (DeFi) world, has established itself through a multifaceted approach to data handling and security. Its architecture is designed for high reliability and accuracy.

Chainlink nodes independently gather data from multiple sources, and this data is then aggregated to form a consensus. This process is key to minimizing the risk of any single point of data failure or manipulation, ensuring that the data fed into smart contracts is as accurate and tamper-proof as possible.

The security model of Chainlink utilizes a decentralized computation model, which not only aggregates data but also verifies it through multiple nodes. This verification process is crucial in maintaining the integrity of data, especially in scenarios where financial transactions are dependent on the accuracy of real-world data inputs.

In contrast, Band Protocol takes a slightly different approach in its operation. While also focused on decentralization, Band Protocol emphasizes speed and efficiency. Its network is designed to facilitate rapid data transfers, making it a suitable choice for applications that require real-time data inputs, such as those in gaming or prediction markets.

The technical infrastructure of Band Protocol is optimized to reduce the time and computational resources required to process and validate data. This efficiency, however, does not come at the cost of reliability. Band Protocol also incorporates multiple layers of data validation to ensure the accuracy and security of the information it provides.

One significant difference between Chainlink and Band Protocol lies in their respective consensus mechanisms. Chainlink's network relies on a larger number of nodes for consensus, which, while enhancing security and reliability, can sometimes introduce more latency. Band Protocol, on the other hand, operates with a smaller set of validator nodes, which allows for quicker data processing and consensus, but with a trade-off in the level of decentralization compared to Chainlink.

Another notable distinction is in their integration capabilities and blockchain agnosticism. Chainlink has a wide range of integrations across various blockchains, making it a versatile choice for many different blockchain platforms. Band Protocol, though also compatible with multiple blockchains, has a particular focus on interoperability and ease of integration, especially with blockchains that prioritize speed and efficiency.

In summary, while both Chainlink and Band Protocol offer robust solutions for bringing external data onto the blockchain, their technical nuances cater to different needs. Chainlink is highly regarded for its security and accuracy, making it a favorite in scenarios where the integrity of data is paramount. Band Protocol, with its emphasis on speed and efficiency, is well-suited for applications that require rapid data updates. The choice between the two often depends on the specific requirements and priorities of the blockchain application in question.


Blockchain oracles, in their various forms and functions, are fundamental to the real-world application and evolution of blockchain technology. From finance to gaming, their role in bridging the digital and physical realms is indispensable, unlocking the full potential of smart contracts.

As blockchain continues to evolve, the development and refinement of oracle technologies will remain a critical area of innovation, shaping the future of this transformative digital landscape.