A paradox lies at the heart of smart contract-enabled blockchain networks.
They are democratic (distributed), tamper-free (immutable) and transparent, but in order to realize anything close to their real potential, they must connect to the physical world. This imperative makes them subject to some of the vulnerabilities that blockchain technology was designed to surmount — including centralization and opacity.
Blockchain oracles are the means by which real-life data — like football scores, rainfall measurements or election results — are transmitted to a blockchain. Imagine that Alice and Bob wish to place a wager on the outcome of a horse race. How would the smart contract know who to give the winnings to? An oracle can retrieve the information from the real world and deliver it onto a blockchain.
Oracles are particularly critical for the emerging DeFi sector, given its need for secure price information to ensure that actions such as liquidations and prediction market resolutions work smoothly. “Fundamentally, oracles aim to answer the simple question: How can off-chain data be securely reported on chain?” notes a recent book, DeFi and the Future of Finance.
As the world moves toward Web3 — i.e., third-generation internet, where decentralized solutions are expected to dominate — oracles will likely become more prominent, Joe Petrowski, technical integrations lead at the Web3 Foundation, tells Magazine. Oracles will be needed to inform decisions and also, perhaps, enforce decisions. Their uses, too, are projected to go beyond providing price feeds for DeFi…