Blockchain technology continues to evolve, opening up new possibilities for financial markets, decentralized applications (dApps), smart contracts, and the Web3 ecosystem. However, blockchains have one fundamental problem: they are isolated from the outside world. This means that smart contracts can only work with information that is already stored on the network, but cannot receive up-to-date data from the outside, such as exchange rates, sports scores, or weather conditions.
To solve this problem, oracles were developed - special services that transmit data from the outside world to the blockchain. Their use allowed to significantly expand the functionality of decentralized applications and bring dynamism to them.
Why Blockchain Needs Oracles
The main feature of the blockchain is its determinism - all operations in the network are carried out strictly according to specified algorithms, and the network itself functions without being tied to the outside world. This provides a number of advantages:
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Reliability and immutability of data stored in the blockchain.
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Transparency of all operations, as the data on the network is publicly available.
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There is no central governing body, as the network is run by nodes.
However, this approach has a limitation: the blockchain is not able to receive data from the outside on its own, which makes it less flexible for use in the real world. For example, if a user wants to create a smart contract for crop insurance against drought, they need to receive weather data. Since the blockchain cannot access weather services directly, it needs an intermediary - an oracle - to transmit the necessary data to the network.
Without oracles, many smart contract use cases cannot be implemented, including:
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Automatic execution of transactions based on changes in the cryptocurrency rate.
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Creation of decentralized insurance contracts dependent on weather conditions or other factors.
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Development of decentralized finance (DeFi), where it is necessary to obtain current asset quotes.
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Conducting bets and lotteries where it is important to take into account the results of external events.
Oracles solve this problem by providing a link between the blockchain and external data.
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How Oracles Work
The principle of operation of oracles consists of several stages:
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Request for data. The smart contract generates a request to the oracle indicating the type of data that is needed. For example, a DeFi protocol might request the current Ethereum to dollar exchange rate.
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Collecting information from an external source. An oracle receives data from one or more sources, such as exchanges, financial platform APIs, IoT sensors, and others.
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Validation of information. In the case of decentralized oracles, data is verified by multiple independent nodes to ensure its accuracy.
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Transferring data to the blockchain. The verified information is loaded into the smart contract, which uses it to fulfill the request.
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Using data by smart contract. After receiving the information, the contract makes a decision, such as executing the transaction or activating the payout.
This process seems simple, but it involves many technical details such as validation mechanism, protection against attacks, and ways of aggregating data.
Types of Oracles
Oracles come in several types depending on the direction of data transfer, its source, and the degree of decentralization.
By data transfer direction
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Inbound Oracles — transmit data to the blockchain. For example, an oracle can download exchange rates or weather.
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Outbound Oracles — transmit data from the blockchain to the outside world. For example, they can send commands to IoT devices or notify the banking system.
By data source
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Software Oracles — receive data via APIs and databases. For example, cryptocurrency quote oracles receive information from exchanges.
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Hardware Oracles — collect data from physical sensors, for example, monitor the status of cargo in logistics.
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Human Oracles — experts who confirm the reliability of information (used in decentralized courts and prediction markets).
By degree of decentralization
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Centralized Oracles — are managed by a single organization, which creates a risk of data manipulation.
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Decentralized Oracles — receive data from multiple sources and verify it using consensus algorithms.
Current Oracle Technologies
Oracle technologies have been rapidly evolving since the 2020s, and several trends have emerged by 2025:
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Increased decentralization. Modern oracles use consensus between nodes to verify data. For example, Chainlink combines data from multiple sources.
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Optimization of gas costs. Oracles are developing new algorithms to reduce the cost of updating data in the blockchain.
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Cross-chain compatibility. In 2025, oracles that transfer data between different blockchains are widely used, for example, LayerZero and Pyth Network.
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Use of AI. Artificial intelligence helps analyze data and prevent manipulation.
The Biggest Oracles
Chainlink (LINK)
One of the most popular decentralized oracles that supports hundreds of DeFi projects.
Python Network
Specializes in high-frequency financial data, often used in Solana.
API3
Allows dApps to receive data directly from APIs, cutting out intermediaries.
Band Protocol
Works with various blockchains and features high data processing speed.
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Risks and Problems of Oracles
Despite the development of technology, the use of oracles is associated with a number of risks:
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Centralized vulnerabilities. Many oracles depend on a small number of data sources.
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Data manipulation. If an attacker is able to falsify the data, it could lead to financial losses.
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Delays in updating. Some oracles do not transmit data in real time, which can lead to errors in DeFi protocols.
To solve these problems, systems with multi-layer data validation and cryptographic protection methods are being developed.
Oracles are an important element of the blockchain infrastructure that allows smart contracts to work with real-world data. They have now become more decentralized, secure, and compatible with different blockchains.
With the advancement of technology, oracles are finding applications in finance, insurance, logistics, and even smart city management. Their role in the Web3 ecosystem continues to grow, making decentralized applications even more powerful and functional.
