In ancient Greece, an oracle was a female priest who gave people advice from the gods. This priestess acted like a medium by revealing knowledge or answering questions. In the modern world, Oracles are essential services that act as bridges between blockchain networks and the external world. They are trusted intermediaries for the exchange of data by enabling smart contracts to access real-world data or connect to external IoT (Internet of Things) systems.

Since blockchains are designed to be secure, deterministic, and tamper-proof, they operate in an isolated environment. Consequently, there is a lack of direct access to external data like asset prices on centralized crypto exchanges, the stock market, or sports results. Above all, self-enforcing contracts, although called “smart,” cannot fetch those external data independently. At this point, oracles come into play by serving various functions in Web3, like providing price feeds for DeFi applications, transmitting IoT device data, delivering scores for betting platforms or providing weather data for insurance contracts.

Let`s use the metaphor of a fashion show again to illustrate the role of Oracles in Web3:

Imagine a blockchain as an exclusive fashion show held in a fancy, isolated location. However, independent of the artistic brilliance of the fashion designer, the show's success depends on incorporating the latest trends and styles from the outside world. Fashion designers may create beautiful outfits, but their designs depend on inspiration, trends, and the zeitgeist. But, very much like smart contracts, designers are bound to their surroundings and cannot fetch all this information by themselves. Trend scouts and fashion reporters covering diversity worldwide collect the latest trends and developments and bring this information back to the designers.

Oracles do exactly this around blockchains, where inbound Oracles fetch data, just like scouts bring updates from social media, magazines, and red carpets, and outbound Oracles send data, just like designers want feedback or reviews of their work or show.

Simply put, Oracles function as fashion scouts. They gather information from external sources, validate data (such as the authentication of designer pieces), transmit or “dress” data in a blockchain-compatible format, and allow the execution of smart contracts.

In a sense, Oracles are injecting lifeblood into smart contracts, enabling real-world data integration into blockchains. While they introduce new security risks (the so-called Oracle Problem), decentralized or consensus-based Oracle networks can be seen as solutions to minimize trust assumptions.

This article was authored by Nils Otter, a DAO member of The ALANA Project.

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