What are Oracles?

Oracles are entities that provide blockchains with the opportunity to engage with off-chain information. Even though several contracts and decentralized systems are able to connect to a single oracle, a type of contract-specific oracle was created to work as a single smart contract.

There are various types of oracles according to their usage. The main ones are the following:

• Human Oracles. People with different subject knowledge who are able to verify, validate, as well as fetch data for utilization by blockchain-based agreements.
• Software Oracles. These are the most commonly used oracles that retrieve online data from other programs and web APIs, such as market prices, airline status, and weather information.
• Hardware Oracles. Such oracles provide real-world data for smart contracts by integrating with physical systems and technology. Hardware oracles can interface with RFID sensors used in a variety of industries.
• Outbound Oracles. Such oracles send data from smart contracts to external systems, allowing smart contracts to interact with non-blockchain sources.
• Inbound Oracles. External data is sent to smart contracts or software oracles via inbound oracles. These oracles can be specified as a set of "if" rules, for example, "place a buy order if an asset reaches a specific price".
• Consensus Oracles. Such oracles are a type of decentralized oracles that collect huge volumes of data from a small number of other oracles and use certain procedures to assess the validity and correctness of the data.

Besides, note that oracles that depend on a single data supplier are referred to as centralized, whereas those that interfere with various sources are referred to as decentralized. However, in an essence, a blockchain oracle is a third-party data source that requires external permission to function successfully, which implies that it's typically a centralized entity's tool. As a result, most oracles sacrifice the smart contracts' decentralized features.

The majority of crypto enthusiasts would refer to Band Protocol (BAND) as well as Chainlink (LINK) as classic instances of decentralized oracle networks.

Besides, it's important to note that oracles are not data sources. Instead, they gather, query, and verify information from many sources before delivering it to smart contracts.

In addition, the transmitted information can be anything from payments, price feeds, temperature from a sensor, scores from a basketball game, and so on. Most of the time, oracles are assigned depending on where they draw their information from, their sources, the flow of data, and whether they are decentralized or centralized.

The Oracle Problem

Smart contracts perform different duties depending on the data provided by centralized oracles, implying that oracles have enormous influence over smart contracts. The Oracle Problem is a conflict of trust that centralized third-party oracles introduce into trustless smart contracts and blockchain systems.

Even though decentralized oracles, such as consensus oracles, may appear to be a viable option, there are still numerous obstacles to overcome, as decentralized oracle networks are difficult to create in a secure, functional, and trustless manner.