The blockchain ecosystem has granted us a decentralised world where smart contracts automate transactions. However, the blockchain itself behaves like an isolated island - it cannot directly pull in real-world data. So how do smart contracts know the price of Bitcoin, the weather, or the outcome of a football match? The answer lies in oracles - the crucial link enabling blockchain to interact with the outside world.

What are Oracles in blockchain?

An oracle is a bridging mechanism that transmits data from the real world into the blockchain. It supplies information for smart contracts so that they can execute predefined logic automatically. Without an oracle, a smart contract would only operate within the internal data of the blockchain, drastically limiting real-world applications.

Why do smart contracts need oracles?

Smart contracts execute only when conditions are met. For example, an agricultural insurance contract may pay out only when weather data confirms a drought. Yet the blockchain cannot itself fetch weather information from external systems. This is where oracles come into play:

They gather off-chain data from external sources.
They verify the accuracy of the data.
They deliver the data into the smart contract to trigger execution.

You can learn more about smart contracts here

Common types of oracles:

Instead of a table, here is a description of commonly used types:

Software oracle: collects data from the internet such as cryptocurrency price APIs, weather data, exchange rates.
Hardware oracle: obtains information from physical sensors, IoT devices, or QR-code scanners.
Inbound oracle: brings data from the real world into the blockchain.
Outbound oracle: sends signals from the blockchain out into real world systems, for example unlocking a smart car.
Cross-chain oracle: transfers data between different blockchains, enabling multi-chain interaction.

How do oracles operate?

The basic process involves four steps:

A smart contract requests a specific data type.
The oracle acquires the data from an off-chain source (API, sensor, external system).
The oracle processes and verifies the data (especially for decentralised oracles).
The data is fed into the blockchain, enabling the smart contract to act on it.

The Oracle Problem - system vulnerability

Oracles can become a weak point if they are attacked or deliver incorrect data. This issue is known as the “Oracle Problem”. Current solutions include:

Decentralised oracles (such as Chainlink, Band Protocol) - data is collected from multiple independent sources, reducing single-point risk.
Staking and penalty mechanisms - nodes that provide false data may lose their staked assets.

Real-world applications of oracles:

DeFi: updating asset prices for lending, trading, and liquidation.
Decentralised insurance: automatic payouts upon events like flight delays or natural disasters.
Blockchain gaming/NFTs: verifying outcomes, generating true randomness, or tracking game events.
Supply chain logistics: recording shipment condition, location and temperature data.

Conclusion:

Oracles act as the “eyes and ears” of the blockchain, allowing smart contracts to perceive and react to the real world. Without them, blockchains would remain isolated and lack practical utility. Thanks to oracles, sectors such as DeFi, insurance, logistics and blockchain gaming can advance and flourish.