How Do Oracles Work in Blockchain?
In the realm of blockchain technology, oracles serve as crucial intermediaries that connect smart contracts with external data sources. Smart contracts, self-executing contracts with the agreement directly written into code, often require real-world information to function optimally. This is where oracles come into play.
Oracles can be categorized into two main types: centralized and decentralized. Centralized oracles are controlled by a single entity, which can lead to trust issues and a single point of failure. On the other hand, decentralized oracles utilize multiple data sources to provide a more reliable and tamper-proof method of data transmission. Examples of decentralized oracles include Chainlink and Band Protocol.
The process begins when a smart contract requires data outside the blockchain environment. It sends a request to the oracle, which then retrieves the necessary information from external data sources such as APIs, websites, or databases. After obtaining the data, the oracle sends it back to the smart contract, allowing it to execute based on the real-world information received.
By bridging the gap between blockchain networks and the external world, oracles enable smart contracts to react to real-time events, enhancing their functionality and applications across various industries, including finance, insurance, and supply chain management.