Author: Catherine
Created:
In crypto, an oracle is a trusted entity that connects blockchains to real-world, external data, acting as a bridge between off-chain systems and on-chain smart contracts. Because blockchains are isolated from the outside world, oracles are necessary for smart contracts to execute based on external information like price feeds, weather data, or sports results, enabling a wide range of practical applications in DeFi and other decentralized applications (dApps).
How it works:
- Data Request: A smart contract needs external information.
- Data Retrieval: The oracle fetches the requested data from an external source, such as a price API or sensor.
- Verification: The oracle verifies the authenticity and reliability of the data.
- Data Transmission: The verified data is sent onto the blockchain for the smart contract to use.
- Execution: The smart contract executes its logic based on the received real-world data.
Why they are needed:
- Enabling Smart Contracts: Blockchains and smart contracts cannot inherently access off-chain data. Oracles provide this critical link.
- Expanding Use Cases: They expand the possibilities for smart contracts beyond simple on-chain operations, allowing for real-world applications.
- Automating Processes: Oracles enable the automation of complex processes, such as automatically executing flight insurance payouts based on weather data.
Examples of applications:
- DeFi: Providing accurate cryptocurrency and stock prices for decentralized exchanges and lending platforms.
- Decentralized Insurance: Triggering payouts based on real-world events, like crop insurance based on weather data.
- Supply Chain Management: Tracking goods and updating their status on the blockchain as they move through a physical supply chain.
- Fantasy Sports & Betting: Delivering official sports scores to decentralized betting platforms.
