The global market for IoT (Internet of Things) devices, which can function as hardware oracles, was
valued at $300 billion in 2023 and is projected to exceed $1 trillion by 2030. Approximately 20% of
smart contracts rely on real-time data from software oracles to perform their functions. One of the
most significant challenges facing the rapidly evolving blockchain network is the Oracle Problem.
This problem centers on the difficulty of using and accessing off-chain data for on-chain
applications within blockchain networks. Understanding oracles, their various types, and their role
in Web3 API development is essential to addressing this issue and
finding solutions.
What is the Blockchain Oracle Problem?
Smart contracts on blockchain technology operate in a closed environment without direct access to
outside data. This confinement hampers their ability to respond to current events or integrate
real-time data into their operations. Imagine a blockchain application functioning independently but
blind to external events, like a hermit in a quiet cave. Oracles act as messengers for these
systems, providing an oracle service that sends data from the outside world to the blockchain, such
as the latest weather updates or news.
In other words, oracles link blockchain
applications to actual data, including anything from stock prices to weather forecasts. With
this data, these programs can make more informed decisions. For instance, an insurance policy might
automatically payout if an oracle identifies a storm. However, relying on a single oracle service
introduces a single point of failure, affecting the trust model of the blockchain network. Oracles
bridge the gap between blockchain applications and the outside world, creating opportunities for new
applications like cross-chain capabilities, automated trading, or real-world game features.
Types of Oracles Technology
There are several types of oracles, each serving specific functions within the blockchain ecosystem:
Software Oracles: Databases and web pages on the internet are the sources of
data that software Oracles retrieve. This data includes social media trends, market prices, and
weather forecasts. For instance, a smart contract may require real-time stock values for
automated trading. Messengers in the form of software oracles retrieve this information for the
blockchain.
Companies using software oracles include Chainlink, API3, Band Protocol, and Witnet.
Hardware Oracles: Blockchains are immediately accessed by real-world devices
through hardware oracles. These gadgets, which include cameras and sensors, can monitor tangible
objects. Consider a smart contract that automatically waters plants in response to soil moisture
levels. Sensors on hardware oracles would measure the moisture content of the soil and transmit
that data to the smart contract.
Companies using hardware oracles Include Thales, Quantstamp, and Pocket Network.
Consensus Oracles: After confirming the accuracy of the data, consensus Oracles
compile it from several sources and post it to the blockchain. This, along with receiving
numerous peers' same exam answers, enhances the reliability of the material.
Companies using consensus oracles include Chainlink, Band Protocol, and The Graph.
Inbound Oracles: Inbound oracles offer blockchains with external data, such as
airfare or weather information, that smart contracts can use. This enables real-time
information-driven actions using smart contracts.
Examples of companies using inbound oracles are Ocean Protocol and DIA.
Outbound Oracles: Outbound oracles gather data from the blockchain for external
use. This enables decentralized applications (dApps) to interact with data stored on the
blockchain.
Companies using outbound oracles include Chainlink, Band Protocol, and Pyth Network.
The Role of Decentralized Oracle in Web3 API Development
Blockchains are inherently tamper-proof and secure, but this security restricts their direct
interaction with external data sources. Web3 APIs facilitate communication between dApps and
blockchains. Decentralized oracles act as bridges, connecting blockchain-based applications to
external data sources when the blockchain requires such data.
How Oracles in Web3 Work: A Framework
Data Fetching Consider that a dApp needs the weather forecast. It requests a Web3 API to
retrieve this data, and the API forwards the request to an Oracle with the necessary data
included. Oracles retrieve this data using various methods, such as dedicated connections for
real-time data or web requests.
Data Validation and Verification To ensure the accuracy of the fetched data, oracles act like
detectives, verifying the information comes from reliable sources. This might involve special
codes or confirmation from other oracles.
On-Chain Transmission Once verified, the Oracle sends the data back to the dApp through the Web3
API, ensuring a secure delivery process.
Smart Contract Execution: The dApp can then trigger actions based on contract conditions using
the received data. For example, a news app might trigger an update based on a confirmed news
article.
Continuous Monitoring Oracles constantly seek new information to ensure smart contracts have the
latest data, preventing reliance on outdated information.
Examples of Oracle Solutions in Web3 API
Chainlink: Chainlink is a well-known provider of strong decentralization,
security, and adaptability Oracle solutions for a range of applications. Its decentralized
network of node operators guarantees data integrity and decreases manipulation risk.
Strengths:
Decentralization
Security
Flexibility
Use Cases:
Decentralized Finance (DeFi)
Supply Chain Management
Band Protocol: Band Protocol is recognized for its scalability and
interoperability. It facilitates efficient data delivery for smart contracts at scale and
allows developers to access data from multiple blockchains seamlessly.
Strengths:
Scalability
Interoperability
Ease of Integration
Use Cases:
Gaming and NFTs
Decentralized Marketplaces
Witnet Witnet prioritizes data confidentiality and minimizes reliance on trusted third
parties, making it ideal for applications requiring privacy.
Strengths:
Although the Oracle Problem is a significant obstacle for blockchain technology, Oracle development
is helping to close the gap between off-chain and on-chain data. Knowing the different kinds of
oracles and how they are used in Web3 API development reveals that these instruments are essential
to creating decentralized applications and smart contracts. Combining AI and oracles will surely
open up new opportunities and spur innovation
across various industries as blockchain technology develops.
About Author
Rubiya Naveed
Rubiya is a seasoned content writer at Vanar, a pioneering Layer
1 blockchain company. With a passion for cutting-edge technologies and industries, Rubiya brings
a wealth of experience and enthusiasm to her role. At Vanar, she specializes in crafting
insightful and engaging blockchain blogs, helping to demystify the complexities of blockchain
technology for a diverse audience. Her expertise extends beyond the technical aspects, weaving
in creativity to make the content not only informative but also compelling.
