In Greek mythology, oracles took once unattainable information from the gods and shared it with the world. Today, blockchain oracles pass information from one source to another. By design, a blockchain does not communicate with outside data sources; they only store historical on-chain user data. A blockchain oracle is the middleware that allows a blockchain to communicate with off-chain data. The addition of off-chain data provided by blockchain oracles was a huge step forward for the Web3 industry, enabling new use cases in decentralized finance and other fields. If someone owns or has access to useful data, spinning up a blockchain oracle could be profitable.
“Oracle” is a broad term in the industry. There are many blockchain oracle protocols to choose from. The default option is Chainlink (link resides outside ibm.com), which has significant adoption (link resides outside ibm.com) across layer 1 blockchains (link resides outside ibm.com) and protocols running within them. With that said, each oracle option has different requirements and procedures to get a user’s precious data from Web2 to Web3. Though the process may be slightly different for each protocol, node hosts still face similar challenges (such as managing tedious day-to-day API maintenance, ensuring quick and secure data transfer, and developing the technical know-how to create and manage a blockchain oracle protocol’s node). APIs can be used by blockchain oracles to access and retrieve data from external sources, which can then be used to trigger smart contract executions or update the state of a blockchain-based application.
Web3 blockchain technology leapt forward with the introduction of oracles and their ability to bring off-chain data on-chain. GitHub, with over 4000 repositories touching Chainlink (link resides outside ibm.com) alone, shows just how popular oracles have become. Blockchain oracle protocols like Chainlink offer a chance to establish nodes and receive compensation for successfully providing data. Decentralized finance protocols like Aave (link resides outside ibm.com), Compound (link resides outside ibm.com) and Maker (link resides outside ibm.com) require off-chain price feed data to allow for options, futures, synthetic assets and more. Insurance protocols like Arbol (link resides outside ibm.com) use off-chain rainfall datasets to “settle (link resides outside ibm.com) parametric crop insurance contracts that provide coverage based on the amount of rainfall in the region.” Another project, Etherisc (link resides outside ibm.com), provides flight delay insurance by using off-chain flight data. For these projects to function, data providers must properly manage their APIs and ensure their data is flowing continuously and accurately. Because blockchain technology is so new, and oracles are even newer, projects spring up each day.
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