Introduction: Why Do We Need Oracles?

In the blockchain world, there is a seemingly paradoxical dilemma: on-chain applications need to rely on real-world data, but the blockchain itself is a closed system. Smart contracts are powerful, but they can’t directly “go online” and cannot autonomously obtain external information such as weather, prices, interest rates, or voting results.

Imagine that if you want to borrow USDT by collateralizing ETH on a DeFi platform, you need to know the real-time price of ETH; if you want to play an on-chain sports prediction game, you need to know the final score of the match. Without external data inputs, smart contracts are “deaf” and can’t make correct decisions.

Thus, the Oracle was born. It is the bridge between on-chain and off-chain, allowing smart contracts to use real-world data in a secure and trustworthy way.

What Is an Oracle?

An oracle is not a “fortune teller,” but a data transmission mechanism. Simply put, the oracle’s job is to:

• Obtain data from the outside world (off-chain);

• Verify the authenticity of the data in a decentralized way;

• Then transmit the data onto the blockchain for smart contracts to use.

In plain terms:

The blockchain is like a “closed financial computer,” smart contracts are the “programs,” and the oracle is the “API interface,” responsible for converting facts from the outside world into inputs that smart contracts can understand.

Comparing SocialFi’s Operating Logic with Oracles

In the previous article we discussed that SocialFi’s logic is “social + finance,” relying on user data and interactions, while the oracle’s logic is “real world + on-chain,” relying on data sources and verification mechanisms. Both emphasize one core idea: the valorization and credibility of data.

The oracle’s operating logic is divided into three steps:

• Data collection: For example, obtaining raw data from exchanges, IoT devices, or weather APIs.

• Data verification: Different nodes submit the same data, and the system selects a trustworthy result through mechanisms such as weighting, voting, and reputation.

• Data on-chain: Verified data is written to the blockchain via the oracle for smart contracts to call.

For example:

• DeFi lending protocols need to know the real-time price of ETH/USD;

• NFT games need an external random number (fair draw);

• Insurance contracts need to know whether a flight was delayed.

All of this depends on oracles.

Classifications of Oracles

Oracles are not a single model, but a vast system. Different blockchain projects and different application scenarios have very different needs for oracles, so the industry has gradually formed multi-dimensional classification methods. Common criteria include data direction, data source, and degree of centralization, but in fact each category contains more fine-grained logic.

1. By Data Direction

1. Inbound Oracle
   The core role of an input-type oracle is to transmit off-chain data to on-chain. This is the most common type, especially in DeFi.
   For example, a lending platform must know the latest market prices to determine whether collateral has triggered liquidation conditions. Without input-type oracles, smart contracts simply cannot automatically execute liquidation logic.

Chainlink is a typical input-type oracle. It brings real-time prices of assets like BTC and ETH on-chain through numerous data providers and nodes.

2. Outbound Oracle
   In contrast, the mission of an output-type oracle is to send on-chain data to off-chain. Imagine a scenario: an insurance contract confirms your flight delay on-chain, the smart contract triggers a payout, and at the same time, through an oracle, sends an instruction to a bank payments system or payment gateway to transfer funds to your bank card. This is a typical output-type oracle application.

Although output-type applications are less common than input-type ones, they are extremely valuable in cross-border payments, supply chain finance, and IoT applications.

2. By Data Source

1. Software Oracle
   Software oracles primarily collect data from websites, APIs, and exchanges. Their advantages are low integration thresholds, rich data, and fast speed.
   For instance, an oracle may pull flight status from a flight API, weather data from a weather API, or real-time prices from Coingecko or Binance interfaces. The problem is that APIs themselves may be attacked or tampered with. If the source data is untrustworthy, putting it on-chain is useless. Therefore, software oracles usually combine multi-source verification.

2. Hardware Oracle
   Hardware oracles interface directly with physical devices in the real world, such as sensors, RFID chips, cameras, and IoT devices. For example, in agricultural insurance, sensors can monitor farmland humidity and climate in real time; such data is uploaded on-chain via hardware oracles to automatically trigger payouts.

In supply chain finance, RFID chips can track cargo transportation to ensure the trustworthy execution of “payment upon delivery.” This model is crucial in RWA (Real-World Assets on-chain).

3. By Degree of Centralization

1. Centralized Oracle
   Provided by a single institution or company, such as an exchange that builds its own oracle.

• Advantages: High efficiency and low latency, suitable for low-value or internal closed-loop scenarios.

• Disadvantages: Single point of failure and tampering risk. If one centralized node is attacked, the security of the entire system collapses.

2. Decentralized Oracle
   A decentralized oracle uses multiple nodes to provide data and achieves consensus through mechanisms like voting, staking, and economic incentives. Price data comes from dozens of independent nodes and is ultimately aggregated into a trustworthy value. If a node submits obviously abnormal price data, its staked tokens will be slashed.
   This mechanism avoids the single-point-of-failure problem. Although slightly less efficient, it better aligns with the blockchain’s “trustless” ethos.

4. Other Fine-Grained Types

In addition to the three mainstream dimensions above, there are more granular classifications:

• Cross-chain oracles: Such as LayerZero and Axelar, which interconnect data between different blockchains.

• Human oracles: Data submitted by humans, e.g., “jury decisions” in arbitration systems.

• AI-enhanced oracles: Combined with machine learning to filter abnormal data and reduce manipulation risk.

In summary, an oracle’s classification is not just academic; it critically determines application scenarios, performance, and security.

Oracle Application Scenarios

Oracles are hailed as the “eyes and ears of the blockchain.” Without them, smart contracts are an “information island.” Below, we expand from four directions: finance, insurance, entertainment, and real-world assets on-chain.

1. DeFi Finance

1. Lending platforms
   Aave, Compound, and other lending platforms must rely on price oracles to determine liquidation thresholds. If ETH’s price falls below the collateral ratio, the real-time data provided by the oracle will trigger the smart contract to execute liquidation. Without oracles, liquidation would become manual, and the “automation” of DeFi finance would be impossible.

2. Derivatives contracts
   Perpetual futures, options, and futures products almost all depend on market oracles. For example, dYdX and GMX obtain prices via oracles to ensure derivatives prices track spot markets; otherwise, severe arbitrage and manipulation risks would arise.

3. Stablecoin systems
   MakerDAO’s DAI relies on oracles to monitor collateral values. Without accurate price inputs, DAI could lose its peg, and the entire stablecoin framework could collapse.

2. Insurance Contracts

1. Flight delay insurance
   If a flight is delayed by more than 3 hours, an oracle pulls data from flight databases and triggers the smart contract to automatically send compensation to the user’s wallet. No claim materials are required—everything is completed automatically by the blockchain and the oracle.

2. Weather insurance
   In agricultural insurance, if rainfall in a certain area falls below a threshold, farmers automatically receive compensation.
   These weather data are provided by meteorological station APIs or IoT devices, ensuring objective claims.

3. Health insurance
   In the future, smart wearables or hospital systems may serve as hardware oracles, uploading health metrics to the blockchain to automate health-insurance payouts.

3. NFT and GameFi

1. Randomness oracles
   GameFi and NFT “gacha” mechanics must ensure fairness. If randomness can be predicted, players will exploit it. Chainlink’s VRF (Verifiable Random Function) is an oracle designed specifically for this.

2. Game competitions and events
   In blockchain games or esports, the final score and win/loss information usually occur off-chain. By uploading results on-chain via oracles, prize pools can be automatically distributed, avoiding human interference.

3. Dynamic NFTs
   In the future, NFTs will no longer be static JPGs but can change based on real events. For example, an NFT player card can update stats as the player scores goals, with data input by an oracle.

4. RWA (Real-World Assets)

1. Real estate prices
   Real estate securitization requires accurate valuation. Oracles can pull the latest market prices from authoritative data sources. This gives real references to real estate-backed loans and RWA bonds.

2. Supply chain finance
   IoT devices upload cargo transportation status to the blockchain via hardware oracles. Funds are released only when the cargo actually arrives at the warehouse, preventing supply chain fraud.

3. Commodities trading
   When tokenizing physical assets like oil and gold, oracles input inventory, logistics, and price data so that on-chain financialization of physical assets becomes feasible.

5. Other Emerging Scenarios

• DAO governance: Oracles can provide the authenticity of voting results and even pull real-world data to assist decision-making.

• Cross-border payments: Output-type oracles trigger off-chain payments, realizing “on-chain contract → bank settlement.”

• AI + Web3: AI model training requires massive data; oracles may become the bridge to securely transmit off-chain data to on-chain AI models.

Oracle-Related FAQ

1. What is an oracle?
   An oracle is the bridge connecting the blockchain with the real world, responsible for transmitting off-chain data to on-chain.

2. Why does the blockchain need oracles?
   Because smart contracts cannot directly access external data.

3. Can oracles fake data?
   Centralized oracles may pose risks, but decentralized oracles use multiple-node verification for higher security.

4. Where are oracles mainly used?
   DeFi lending, insurance, NFT, GameFi, and RWA on-chain, among others.

5. How does an oracle work?
   Data collection → data verification → on-chain storage → contract invocation.

6. Do oracles only provide prices?
   No, they can also provide weather, randomness, voting results, and many other data types.

7. Is an oracle itself a blockchain?
   No, it is an external service for the blockchain.

8. What is an oracle attack?
   Attackers manipulate the data source to affect contract execution, e.g., manipulating lending liquidation prices.

9. Where do oracle data come from?
   APIs, exchanges, sensors, IoT devices, etc.

10. Why is Chainlink the leader?
    Because it has many nodes, broad coverage, and strong partners.

11. What’s the difference between an oracle and a cross-chain bridge?
    Oracles transmit information, while bridges transmit assets.

12. Does calling an oracle cost money?
    Yes, you need to pay gas fees.

13. What is a randomness oracle?
    It provides verifiable on-chain randomness for game lotteries and draws.

14. What risks does oracle centralization bring?
    Single-point tampering that can cause system failure.

15. Will AI replace oracles in the future?
    AI may enhance oracles but won’t completely replace them.

16. Can oracles solve stablecoin risks?
    Partially—e.g., by providing real-time collateral prices to reduce crash risks.

17. Are oracles related to SocialFi?
    Yes, SocialFi’s data going on-chain also needs oracle support.

18. Will oracle latency affect trading?
    Yes, especially in high-frequency trading and liquidation scenarios.

19. Are oracles considered blockchain infrastructure?
    Yes, they are key support for the smart-contract ecosystem.

20. Can I build my own oracle?
    Yes, but you’ll need servers, data sources, and on-chain development.

Summary

Oracles are indispensable infrastructure in the blockchain world; they solve the blockchain’s natural limitation of “only seeing on-chain.” Without oracles, smart contracts cannot interact with the real world; with oracles, the blockchain can truly move toward real-world applications.

In fields such as DeFi, insurance, logistics, and gaming, oracles are playing the role of a “data bridge.” In the future, as decentralization, AI, and privacy-preserving technologies advance, the security and reliability of oracles will continue to improve, making them an even more important component of the blockchain ecosystem.