A blockchain oracle is a trusted source of data external to the blockchain. In most cases, it doesn’t generate any data itself but transmits it from other sources such as cloud providers, payment systems, marketplaces, and even other blockchains.
The thing is that each blockchain network is a pretty isolated system, which might be a significant bottleneck in the world of decentralized finance. Blockchains cannot collect data from external sources on their own and stay secure at the same time. For this reason, they have recourse to third parties that provide communication with the outside world.
To make it more clear, let’s take a look at an example.
Imagine you want to buy some ETH with USDT. The task is pretty simple, right? All you need to do is log in to your favorite exchange, find a necessary pair, and place an order. Yet, it is not so simple from the technological point of view.
Since smart contracts of the exchanges you use don’t know exactly the current rate of listed tokens, they constantly acquire this information through an oracle. This way, an oracle works as a reliable data transmitter that ensures the correct work of the whole system.
To break it down even further, if it weren’t for blockchain oracles, buying and selling cryptocurrency would be as problematic as posting a photo on Instagram with no internet connection. And it’s not only about crypto exchanges – no DeFi tool would work correctly without the help of an oracle.
Now that you know what blockchain oracles are and why we need them in the first place, let’s figure out how they work.
Being connected to a particular blockchain by API, oracles collect necessary external data from chosen sources and validate it. Then, they reformat this data so that the blockchain can read it. Eventually, they transmit the data, and the network executes a smart contract.
Depending on the type of the blockchain oracle, its principle of work may differ.
Centralized oracles request data from one external source that ideally has to be tamper-proof and provide a high level of security. In fact, such oracles might be less reliable and present a single point of failure. If the attackers get access to the central entity, they could broadcast malicious data to the network.
On the other hand, decentralized oracles are aimed to overcome this problem. They acquire data from multiple sources, thus, verifying it in a peer-to-peer manner and ensuring its accuracy and security.
To sum up, all blockchain oracles work in the same way by collecting data from external sources and transmitting it to a blockchain network. Yet, the number of sources and the level of security depend on the type of oracle.
There are many worthy blockchain oracles in the market, but for now, we’ve made up our minds. Similar to the recently launched beta, in the DeHive V1, we are going to use the ETH-CORE Uniswap oracle.
Uniswap oracle will provide DeHive with access to price history and liquidity data. Storing historical data will help reduce integration costs and the possibility of logical errors on the calling contract. Meanwhile, the liquidity accumulator will keep information about the available in-range liquidity at the given moment of time.
Besides, we have already integrated 1inch technology into the DeHive protocol, which will also help us track the best token prices at the most beneficial conditions. We believe that such a collaboration will help the DeHive cluster prosper and take one of the leading positions in our niche.
Decentralized oracles are essential for any blockchain-related project as they enable communication with external sources. At DeHive, we’ve integrated the Uniswap oracle and 1inch technologies to acquire necessary data and build our cluster.
Moreover, considering all the emerging projects and technologies, we are actively looking for new partnerships. At the moment, we are thinking about another potential collaboration with Chainlink. It is one of the most popular blockchain oracles worldwide, providing advanced technology and an impeccable reputation.
We’ll make sure to keep you updated, so stay tuned!
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