Crypto Oracles: A Comprehensive Explanation

If you have been involved in the cryptocurrency space then you have probably heard of the term crypto oracle. Although a simple concept, they are a vital piece of infrastructure for the cryptocurrency industry.

To put it into context over 90% of decentralized applications utilize this novel technology. So now you are probably asking, what are crypto oracles and why are they needed?

Don’t worry, in this article, I will be answering those questions and much more. So without further ado, let’s jump right in.

Crypto oracles facilitate the transfer of off-chain data onto the blockchain. In other words, they act as intermediaries which bridge the gap between the blockchain and the real world.

What are crypto oracles?

Cryptocurrency oracles are services that connect blockchains to external data sources. They utilize hybrid smart contracts that translate external data to the blockchain. In turn, decentralized applications can react to real-world events.

Why do blockchains need oracles? Simply put, they are important as they allow blockchains to process information from outside this system. Without them, they would be closed systems that can only execute commands using on-chain information. To demonstrate the benefits let’s look at a few examples.

Crypto oracle use cases

Decentralize finance (DeFi) – oracles are imperative for Defi applications. Whether that be stock prices or derivate prices these are all based on external data sources. Essentially, synthetic tokens are created which are pegged to real-world prices. Without accurate information, people would utilize arbitrage.

Dynamic NFTs – oracles can be used to dynamically change NFTs based on real-world events. For instance, the appearance of NFTs could change based on the time of day or what season it is. Maybe the NFT collection changes on key events such as Christmas or Halloween. This is all possible with crypto oracles.

Insurance – let’s say you have an oracle that feeds weather data to decentralized applications. If the rainfall passes a certain threshold then automatic insurance payouts are transferred to those affected. In this case, the farmers whose crops were flooded.

Without oracles, there would be no way of transferring the data from the weather stations over to the decentralized insurance platforms.

Centralized vs decentralized oracles

Centralized oracles are controlled by a single entity. They have authority over how the project is developed and ultimately what data is being relayed. The main drawback to this type of oracle is that there is a single point of failure.

Conversely, with decentralized oracles the control of the project is distributed among multiple parties. As a result, there is not a single point of failure.

Additionally, these systems usually utilize open source code and are permissionless meaning anyone can contribute to the development. Therefore, this is a more democratic solution that highlights any malicious activity thanks to the transparent nature of the smart contract.

The best crypto oracle

Chainlink is hands down the best crypto oracle. This project features a decentralized network of nodes that help relay off-chain information. It is the most reputable oracle in the space with over 1000 projects utilizing this technology.

To incentive people to setup nodes, users are rewarded in chainlinks native token LINK. This is also going to be used in the form of staking rewards once the upgrade is implemented later this year. Validators who secure the network will be rewarded with the token.

Overall, this is the best oracle platform and it is not even close. The network effects are unparalleled. To put it into perspective the second most popular oracle has less than 10% of the market share.

Bottom line

As you can see, blockchain oracles are an essential piece of infrastructure in the cryptocurrency space. Without them crypto would be closed off from the real world and would never reach the heights it aspires to be. With chainlink leading the way I am optimistic that this ecosystem continues to grow. I hope you found this article useful and thanks for reading.

Want to learn about crypto launchpads? Click here to read my previous article.