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Oracles – Crypto Glossary:

Definition: Oracles are intermediary entities that facilitate the interaction between blockchain-based smart contracts and external systems or off-chain data sources. These third-party services play a pivotal role in transmitting vital information from the real world into smart contracts, enabling the execution of predefined conditions and actions.

Key Characteristics of Oracles:

  • Data Transmission: Oracles serve as bridges, transferring data from external sources to smart contracts, empowering them to make decisions based on real-world information.
  • Data Validation: Oracles are responsible for collecting, verifying, and validating data from external sources to ensure its accuracy and reliability before presenting it to smart contracts.

Role of Oracles in Crypto: Oracles are integral components within blockchain ecosystems, allowing smart contracts to interact with data beyond the blockchain. They do not generate data themselves but act as conduits for information from trusted external sources.

Examples of Oracle Use Cases:

  • Weather-Based Betting: Smart contracts that enable users to place bets on weather conditions rely on oracles to access trusted meteorological data for outcome determination.
  • Price Feeds: Cryptocurrency price oracles provide real-time price data from various exchanges, facilitating decentralized finance (DeFi) protocols, decentralized exchanges (DEXs), and more.
  • Transaction History: Oracles can transmit transaction history data, aiding in auditing and reporting within blockchain applications.

Types of Blockchain Oracles:

  1. Decentralized Oracles: Also known as consensus oracles, they gather data from multiple sources and reach a consensus, enhancing data credibility and reliability.
  2. Centralized Oracles: Controlled by a single entity, centralized oracles serve as the sole data source for smart contracts, offering simplicity in architecture but vulnerability to manipulation.
  3. Hardware Oracles: These oracles interact with physical events through external setups, such as sensors, to relay real-world readings directly to smart contracts.
  4. Software Oracles: Software oracles interface with digital sources like webpages, apps, or servers to collect and transmit information to smart contracts, often providing real-time data.
  5. Outbound Oracles: Outbound oracles transmit blockchain data to external systems, facilitating communication from the blockchain to external destinations, like databases.
  6. Inbound Oracles: Inbound oracles facilitate the flow of off-chain data into smart contracts, conveying various information, including temperature readings and asset prices.

The Oracle Problem: Centralized oracles introduce trust conflicts into trustless smart contracts and blockchain systems, raising concerns about data accuracy and reliability. Decentralized oracles aim to address these issues but face challenges in achieving secure, functional, and trustless implementations.

Prominent Decentralized Oracle Networks: Examples of decentralized oracle networks include Chainlink (LINK) and Band Protocol (BAND), known for their critical role in connecting blockchain-based applications with external data sources.

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