An Oracle is an external service that supplies smart contracts with real-world information, allowing them to function based on happenings outside the blockchain. Oracles connect blockchain networks to off-chain data, enabling applications like DeFi lending rates, insurance claims, and supply chain monitoring.
Oracles are key to making applications such as DeFi, insurance, and supply chain management possible by connecting blockchain networks to off-chain data sources. For instance, oracles in DeFi lending platforms, oracles provide on-chain real-time market data like asset prices and interest rates for smart contracts to determine borrowing limits or calculate rewards. In insurance, oracles can fetch weather or flight data to pay out automatically for weather-related claims or travel insurance.
Oracles integrate IoT data, location information, or shipment statuses into blockchain-based systems for supply chain monitoring, and tracking physical assets. This makes sure that every step of a product’s journey is verifiable and transparent: improving accountability and efficiency.
There are different types of oracles: Software oracles that fetch data from online sources, Hardware oracles that get data from physical devices, like sensors, and Cross-chain oracles that facilitate communication between different blockchain networks. Versatility is the key here as these oracles will cater to the different needs of decentralized applications (DApps).
Oracle problem refers to the trust and reliability of the external data that oracles provide, despite their utility. This problem is mitigated by Decentralized oracles like Chainlink which aggregate data from many sources to ensure accuracy and reduce the chance of manipulation.