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Smart Contract Oracles

What are Smart Contract Oracles and Why We Need Them

on May 31, 2021

Photo by Greg Rakozy on Unsplash

Blockchain technology is a real game-changer. Not only has it introduced the much-needed transparency, structure, and security that a host of industries needs but it is also easily integrated with already existing systems. At a core level, we have a new model that is highly standardized while remaining scalable and flexible. Contradiction? No, and here’s why…

So how does blockchain achieve this? 

Through something known as smart contract Oracles

We already know that a smart contract is a digital agreement that enforces itself through computer algorithms. Once programmed, smart contracts can run forever. But despite being created and programmed on a blockchain, smart contracts do not *only* function on the blockchain. Their application extends far beyond. 

At a very high level, an Oracle allows receiving data from outside of a blockchain. Or in other words, an oracle provides a connection between real-world events and a blockchain. Given the amount of data that exists outside of blockchains, Oracles have made it possible to incorporate something happening in the real world into the distributed ledger of blockchain technology.  

Not all sources qualify to be used by oracles for smart contracts. Oracles must use only trusted data feeds that send information into the smart contract.

Oracles are usually supplied by third parties and are authorized by the companies that use them. This removes the need for smart contracts to directly access information outside their network, thus lightening their workload. 

Smart contract oracles: the key to connecting the real world to the blockchain

Think of smart contract Oracles as the bridge that connects smart contracts to data available off-chain or in the real world. An oracle is a service capable of retrieving a source of data that is being fed to a smart contract. The price of a stock, product data, and metrics, delivery schedules are all examples of information smart contract Oracles can provide.  

In this way, oracles open blockchain to some degree of centralization. Smart contracts and Blockchain are in essence decentralized but Oracles are (at least in their most common form) not. The result is a hybrid model that, for the time being, is the only way that blockchain can be plugged into real-world systems. 

Some Oracles are now evolving in distributed service ecosystems like Chainlink and we will see more advanced implementations emerging in the next few years.

Smart contract Oracles have tremendous potential for the supply chain and will be a defining feature of the Blockchain in the future. It is the use of Oracles that connects the Blockchain with the ‘real’ (off-chain) world. The advent of Oracles and companies specializing in their development and use will boost the power of the already robust Blockchain and smart contract technologies across multiple sectors.  

In contract automation, for example, it is vital for many contractual agreements to have relevant information from the outside world to execute certain agreements. Oracles are vital within the blockchain ecosystem because they broaden the scope in which smart contracts can operate. The reliance is justified because smart contracts are the first usable and scalable medium on the internet that can execute pre-specified arrangements without the fear of hindrance. 

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