What is an Oracle blockchain in crypto ?
Cryptocurrency has become an increasingly popular form of digital currency over the past decade, and the use of oracles is one way that it is secured and made more reliable.
But what exactly is an oracle in crypto and why is it important? In this article, we’ll explain what oracles are and how they are used in the world of cryptocurrency.
What is an oracle blockchain
The oracle acts as a bridge between the blockchain world and the real world. It is responsible for retrieving data from the external sources and then relaying it to the blockchain system.
Oracles are important for cryptocurrency because they provide a way for the blockchain to interact with the real world.
This data could be anything from stock prices to weather reports. Without the oracle, blockchain systems would not be able to interact with the outside world.
The oracle concept was introduced in the 1990s, but it has only recently been fully adopted for use in cryptocurrency.
Not only they provide important information from the real world to Blockchains, but they also guarantee that these information are correct. How does this work ?
How can the oracle make sure that the information are true ?
Oracle as a safe information provider
What makes oracles trustworthy regarding their information ? Here is how Chainlink works, the leader on the market.
When a an information request is created, They create different contracts about this demand :
- The Chainlink Reputation Contract : This allows the blockchain to check an oracle provider’s track record to verify its authenticity and performance history, then evaluates and discards disreputable or unreliable nodes.
As explained here, there are some information providers that works on the Blockchain. They are rewarded when they gather information for Chainlink. They also are penalized if the information sent is wrong.
In that way, because of this reputation contract, it is more profitable for these providers to send the best information they can, as they build reputation. Each time they provide good information, their reputation increase, making them more likely to be selected next time for the next request.
Contracts as a proof of correct information
Moreover, there is another contract :
- The Chainlink Aggregating Contract : This contract allows the blockchain protocol to compare different results from a request. If the majority of these providers are sending the same information, it’s more likely to be the good answer.
Let’s say for example that the request is : what’s the weather in Spain today. Out of 100 information providers, 99 are saying “it’s raining”. This aggregating contract will determine that it’s the correct answer, then selecting one of these provider and reward it.
To summarize, oracle providers are rewarded in Chainlink tokens & reputation when they do the job. They can earn money to provide trustworthy information. However if they send wrong informaiton, they will be financially penalized, but also will loose trust, and will be less likely to be selected for the next job.
This structure could be compared to miners when they are securing a proof of work Blockchain.
Example of oracle usage
Let’s show you a concrete example of Oracle usage to make it easier to understand.
Providing information to an insurance Blockchain project
Let’s say for example that an insurance project is Built on Ethereum smart contracts. If you are not familiar with smart ocntract, please read this article :
The idea is simple, if your flight is cancelled, you will be automatically refund the total amount of your flight. The execution of the smart contract is simple, it requires :
- condition (if) : flight cancelled,
- an action to execute (then) : money refund to the traveller
But in order to be executed, this smart contract needs information. How does it know that the flight has been cancelled ? That’s where Oracle systems are coming into play.
Because the oracle is used to validate the data involved in the transaction, it ensures that the smart contract is executed accurately and that the funds are transferred to the correct address.
Oracle will first provide the information required to execute smart contract, but also ensure that the smart contract is correctly executed.
By using this technology, it is a win win situation for both insurance company and the insured.
- Insured : The conditions to trigger the refund are clearly written in the smart contract, making impossible for the insurance company to change it afterwards. If offers transparency and guaranty of the traveler to get the money back if the flight is cancelled.
- Insurance company : The smart contract makes everything automated, which will save them a lot of time and money. There is no one needed to execute the contract. No support needed to talk to the traveler, nobody has to send the money, it’s all automatic.
With Oracle and smart contracts, there is no more inefficiency, no more human adjusters, and no more haggling with insurance companies over the terms of the policy.
More examples of oracle usage on blockchain
Here is some other example of oracle usage :
- Stock exchange : If a cryptocurrency investor wants to make a purchase on a stock exchange, the oracle can verify that the purchase is legitimate by checking the stock exchange’s records. This allows cryptocurrency investors to make informed decisions about their investments without having to worry about fraud or manipulation of the data. Oracles also provide a way for cryptocurrency networks to interact with the traditional financial system.
- Banking system : an oracle could be used to verify that a transaction sent to a bank account is valid, meaning that the money can be used to purchase goods and services. This is especially useful for digital currency users who are seeking to make payments or transfer money to a bank account.
They are many ways to use this service, more and more blockchains projects are working with oracles to gather important information from the real world.
In summary, oracles are an important part of the cryptocurrency ecosystem. They provide a way for the blockchain to interact with the real world and verify data from external sources, allowing for secure and reliable transactions and smart contracts.
By understanding how oracles work, you can better understand how cryptocurrency networks operate and how they can benefit from using blockchain technology.
If you want to read more about cryptocurrencies and blockchain :