As we already know, smart contracts allow you to send and receive money without human intervention. For example, if you wanted to buy a house using bitcoin, you could create a smart contract that automatically transfers funds from your bitcoin wallet to the seller’s bank account once certain conditions have been met (such as when both parties signed off on the contract). 

Smart contracts are already being used by many businesses who want to reduce transaction costs and improve transparency between buyers and sellers. But they’re not necessarily ‘intelligent’ enough to understand what’s happening out there in the real world – so they need assistance in certain contexts. That’s whereoracles come in: third-party sources of information that feed data about the real world into smart contracts when required (or at regular intervals).

So, how does a blockchain oracle work?

In the context of smart contracts, an oracle is a third-party source of information that feeds data about the real world into smart contracts. Smart contracts are unable to process real-world events directly – they can only operate on what they’re told by their creator.

Essentially, these transactions need a way to interact with the real world in order for them to work.  Oracles are therefore needed to provide this information and make sure that it’s accurate. 

Oracles are third-party sources of information that feed data about the real world into smart contracts. They can be websites, databases or even other smart contracts. Oracles communicate with smart contracts through an API (application programming interface). Smart contracts require oracles in order to be practical for complex real-world activities like insurance, borrowing, and lending, or gaming.

All nodes in a blockchain system are required to validate the data (i.e. verify transactions). They must all arrive at the same conclusions in order to confirm this. An oracle posts data to the blockchain after receiving it from an external source, such as an API or a mix of sources. Due to the immutability of blockchain data, a node checking this transaction will always come to the same conclusions.

Additionally, blockchain oracles provide access to data from the real world – like weather forecasts or sports scores – that can be used in smart contracts. For example, if you are running a sports betting platform and want users to pay for their bets with cryptocurrency, an oracle would allow you to get real-time data on sports events so your customers know whether they’ve won their bets or not.* 

Different Types of Oracles

There are different types of oracles. For example: Off-chain data is collected by inbound oracles and brought to the blockchain so that smart contracts can utilise it. Inbound oracles are those that obtain price data on cryptocurrencies or other assets from exchanges. Less often used outbound oracles send data from the blockchain to an external source. There are also software, hardware, human oracles and centralised and decentralised types of oracles that could be mentioned. Oracles are used by Intelly to provide a secure data stream as well.

To conclude,a blockchain oracle therefore is a third-party service that links smart contracts with the outside world, mostly to feed information into them from the outside world but sometimes the other way around. Multiple sources are combined to provide information from around the world, resulting in decentralised knowledge. The ability to interact with the real world through smart contracts is a game-changer. It opens up all kinds of possibilities for how blockchain technology can be used in business, but it also presents some big challenges. How do you know if something has happened? How do you find out what information is available and how reliable it is? And how do you make sure that data isn’t tampered with before sending it onto other parties? These are all questions that need answering before we can start building applications on top of blockchains – which is why oracles are so important for blockchains’ healthy operation.

*Oracles usually work with blockchain technology providers such as Hyperledger and Ethereum to provide this functionality.