For thousands of years, oracles were understood to be the mouthpieces of the Gods, communicating their intentions, instructions, and desires for us in the mortal world. Their messages were veiled in metaphor and often misinterpreted or heard too late. In the web3 context, oracles perform a distinctly different function. (I’m guessing that doesn’t surprise you much.) What both versions have in common is that they answer the questions posed to them by the living mortals who seek to use them. And while the mythic oracle is of questionable validity/existence, web3’s oracles offer concrete, crystal clear information about the world around us in a way that enables the dazzling, fascinating possibilities of web3 technologies like smart contracts.
Oracles are the eyes, ears, nose, thermometer, barometer, et cetera of web3. They are the connection point between the real world and the digital world - but they aren’t really something that you at the personal level will ever own. They are not assets - in the same way that wi-fi is not an asset. You don’t buy an oracle, you don’t collect oracles. They are not NFTs, tokens, or anything else. In short, there is no action to take with oracles - but understanding what they are, what they’re used for, and how they help new technology function ought to help expand your understanding of web3 in general.
Chainlink defines oracles as blockchain “entities that connect blockchains to external systems, thereby enabling smart contracts to execute based upon inputs and outputs from the real world.” Oracles continuously grab data from agreed upon sources, constantly funneling the active state of the smart contract into if/then conditions.”
Imagine a smart contract on the blockchain like a heating system in a house. This heating system operates based on specific rules, like turning on when the temperature drops below a certain point. However, the system itself can't tell what the temperature is outside or inside the house. It needs a thermostat to get this information to work correctly.
In this scenario, a thermostat acts like a Web3 oracle. The thermostat monitors the temperature and provides that information to the heating system. When the thermostat reads that the temperature has fallen to the set point, it tells the heating system to turn on.
Oracles collect data from the outside world - like temperature readings, but in the case of blockchain, it could be stock prices, election results, etc. - and feed it to the smart contract. The smart contract, just like the heating system, then executes its functions based on this real-world data.
Consider all the types of real-world data which are integrated into digital systems and technologies. Weather phenomenon, agricultural supply and demand, financial activity, sporting and competitive events. All of them have trackable data associated with them which can be recognized by an oracle and used to trigger action on a smart contract on a blockchain. When we imagine a future driven by automation (and possibly employing fewer humans), it will be oracles making it possible through recognizing conditions which trigger smart contracts into autonomous action.
Having painted a picture of how oracles fit into the smart contract ecosystem, let’s take a look at some sectors and industries whose engagement with oracles promises grounded but exciting innovations and development.
Decentralized Finance
Traditional banking and financial institutions have been a middleman of exchange since the origin of capitalism. It is through these brick and mortar institutions that individuals, companies, groups and organizations, even nations access financial tools and currency. Decentralized finance, managed through smart contracts and oracles, promise to remove the middleman and allow the exchange of assets between individuals in a reliable, secure, and transparent fashion that enhances efficiency and thereby lowers the cost of doing business.
Oracles grab data on a financial blockchain for a number of purposes and applications in defi. It can follow the paper trail of a person’s digital wallet to define safe and reasonable loans and terms for customers based on their portfolio. Banks/lending institutions can use them, of course, but so can individuals for peer-to-peer exchanges. Imagine you want to exchange 5 tokens for $20 - how do both parties know that one another has their respective piece of the agreement? An oracle verifies that. They can verify the legitimacy of a potential borrower’s claimed on-chain assets as well as verifiable, agreed-upon data sources for verifying real-world assets. Oracles are the trust-builders of a smart contract.
Secondary Sales
Oracles can play a huge role in making sure secondary sales are researched and verified. Consider a vehicle with a computer system onboard. The instant a car is attached to any equipment at a body shop or oil change station, a report is generated and stored within the vehicle. Built-in oracles can be set to assess and record the status of each system within the vehicle, creating a comprehensive and true history of the vehicle that can accurately define the vehicle’s exact resale value. The application of this type of diagnostic analysis goes beyond vehicles, but consider the impact this could have there. Information asymmetry goes out the window, allowing for fairer pricing and evaluation which removes the potential for exploitation when selling or buying.
Insurance
Imagine you have flood insurance for your home, and unfortunately, your home actually floods. Right now, if your home floods, you enter a race against time—and your neighbors—to file a claim, document the damage, get it assessed by an adjustor, and finally secure a repair company. In a widespread flood situation, this becomes a logistical nightmare as everyone scrambles for limited resources.
But what if this could be automated? Imagine a system where weather data or a simple rain gauge and flood sensor could initiate the claim process. Add to this the capability for homeowners to upload verified images of the damage. Contractors could then evaluate the scope of work needed, as they normally would before starting repairs, and send that directly to the insurance company.
This is where oracles and smart contracts come into play. Oracles could gather and verify data from various sources – weather reports, rain gauge readings, flood sensor readings, damage images, and contractor quotes.This information would then trigger a smart contract, automatically initiating payouts under certain conditions. Furthermore, the system could be designed to release funds to contractors based on verified work milestones, using AI for verification. It could allocate funds for policyholders' hotel stays, in cases where their policy covers such expenses. It could even allow for multiple quotes to come in from contractors, all the while ensuring the homeowner can focus on what matters while the necessary processes occur in the background.
Misinformation and Fake News
Our world is inundated with conflict and crisis and breaking news, and our news feed and social media platforms abound with varying degrees of untruth, distortion, manipulation, or outright fabrication. At times, it’s easy to question if anything is truly trustworthy any longer. Oracles are no magic bullet for this malady, but it can certainly make a sizeable dent in the problem.
A programmed oracle from a news source dedicated to accuracy in reporting could use metadata on pictures to identify where they were taken and when. Consider this a reverse image search on steroids. So if a photo is alleged to be from some current conflict but was actually taken elsewhere under different circumstances, that can be instantly identified, and its falseness pointed out. Media outlets could use this type of technology to ensure that their content is true/accurate, and readers could gain back a modicum of trust in news. It could also be used to investigate claims. Weirdly, Fox Corp and Polygon have worked together to create a platform called Verify, that allows publishers to register media and thus create a history for the piece, tying it back to its origin (The Fox Corp part is weird, not the Polygon part).
As I said earlier, you’re unlikely ever to notice the presence of oracles in your daily life - but you will notice the new features offered to you in a number of different industries and sectors, and they will increase the speed of adoption of web3 in general. They:
1 - Improve trust and transparency via enhanced security
2 - Make smart contract use more common
3 - Broaden integration of real-world things with tech
Maybe you’ve detected this on your own already, but I’ll be honest - I find oracles fascinating. They are the contact point between the newest, most advanced capabilities of various functions of the web3 world and the actual physical world. Oracles are like the buckets of a water wheel in a river. The wheel uses the power of the river’s current to turn the wheel and carry water to dry land, thereby turning unusable land into farming ground. Like the water wheel changing what’s possible in a piece of land, an oracle - through its functioning - allows new possibilities to exist in the world.
That said, it remains important to stay grounded in terms of identifying their limitations and how they can be used in a harmful way. After all, what new technological system hasn’t been used to some degree in their earliest stages as weapons?
All the positives don’t matter if not attached to a decentralized system with multiple data sources. If you only have a targetted set of inputs, the oracle will verify fake news. After all, an oracle is not sentient: it is programmed to search specific data and then take a prescribed action. It can’t verify the truth in an objective way; it is dependent on the agreed upon inputs for this. It links systems. As more data points and sources go into the system (which is decentralized and non-fungible) its importance and effectiveness at detecting reality grows - but it will never/can never be SkyNet. It is not AI. It reports on things and may generate insights, but it does not trigger or initiate anything: oracles are reporters.
Oracles can be tricked into thinking the wrong thing through limiting its data sources to false or misleading information, and there are hackers and bad actors out there intent on steering them wrong. A Sybil Attack is an example of how an oracle can be manipulated. Basically, one user creates a large number of fake identities, and then this volume of users can give the one bad actor control of the network. This allows them to feed in false data, create a false consensus in votes, and block users. In some cases, they can also alter transactions so that they profit.
(It should be pointed out that, just like the antivirus programs that protect your computer, mobile phone, etc., the protections for oracles and all other Web 3 developments strengthen with time. We should acknowledge and accept that some vulnerability persists in these systems - oracles included - but also keep in mind that every time a hacker or virus attacks, the security of the affected system is updated and strengthened.)
Oracles are central to web3 running and operating smoothly and can bring about many benefits that evangelists preach, but only if you actually want those benefits. Don’t expect to see these and the decentralized web pop up in any countries that are run by despots. By now, it should be clear how oracles connect different components of web3. Hopefully, this breakdown sheds light on why they are (so) fascinating and impressive, as well as helps clarify how smart contracts function.
For additional information on oracles, here are some helpful sources: