Oracle: The bridge of information between blockchain and the real world

The Deadly Shortcomings of Blockchain

Blockchain is renowned for its decentralization and security, but these two major advantages also come with serious costs — it is isolated within an information silo. Simply put, on-chain systems can perfectly handle their own data consensus but cannot actively read or output off-chain information. This is like a permanently offline computer that, no matter how powerful, can only operate within its own hard drive.

The root of this dilemma lies in the blockchain’s “Impossible Triangle”: security, decentralization, and scalability, which cannot all be achieved simultaneously. To ensure maximum security and complete decentralization, blockchains must make compromises on scalability and external data access capabilities.

The Urgent Need in Practical Applications

However, real-world scenarios demand that blockchains perceive external information. Consider the following scenarios:

• Derivatives Trading: Smart contracts require real-time asset price data to execute clearing and settlement
• Supply Chain Traceability: Needs to access IoT sensors and e-commerce platform data to track product flow
• Insurance Claims: Requires calling actual event information to determine if a claim is valid

The common point among these applications is that they all need a trusted intermediary layer to accurately and securely transmit off-chain data onto the chain. This intermediary layer is called a Oracle.

Core Functions of Oracles

Essentially, oracles are data intermediary services, mainly encompassing the following aspects:

1. Data Aggregation and Validation
Oracles collect information from multiple off-chain data sources and verify it through decentralized consensus mechanisms, ensuring that failures or tampering from a single data source cannot affect the final result. This is the first line of defense against data falsification.

2. Handling Complex Computations
Some computational logic is too costly to execute on the expensive on-chain environment. Oracles can perform these calculations off-chain and then synchronize the results to smart contracts, ensuring accuracy and improving efficiency.

3. Economic Incentive Design
To ensure honest data provision, oracle networks often adopt token staking and penalty mechanisms. Nodes must stake assets to gain the right to provide data; false data results in the forfeiture of staked assets.

4. Random Number Generation
In decentralized gaming or betting applications, verifiable yet unpredictable random sources are needed. Due to the deterministic nature of on-chain logic, off-chain random numbers provided by oracles are essential.

Oracle Attack Surface

Although they seem like perfect bridges of information, oracles have multiple vulnerable points:

Price Feed Attacks are the most common and dangerous threats. Attackers manipulate a few price data sources to influence the oracle’s output. In a 2020 flash loan hack on a certain exchange, attackers exploited the oracle’s reliance on a single data source, manipulating prices and using flash loans for arbitrage to profit over ten million dollars.

Front-Running Attacks exploit the transparency of transactions: attackers learn information before the oracle data is published and place orders in advance to profit.

Man-in-the-Middle Attacks occur during data transmission; if the data is not encrypted, attackers can directly tamper with it.

Replaying Attacks involve copying and resubmitting legitimate transactions to trigger erroneous contract execution.

Fortunately, modern oracle projects widely adopt decentralized governance, using distributed nodes and multi-source verification to eliminate single points of failure.

Latest Landscape of the Oracle Sector

Starting with linking protocols like Chainlink (LINK, current price $12.88, -4.77% in 24h), the oracle sector has gradually attracted many new players.

Pyth Network (PYTH, current price $0.06, -4.44% in 24h) has gained attention for its high-frequency data updates and low latency, suitable for high-speed trading scenarios.

UMA (current price $0.73, -1.97% in 24h) takes a different approach with its optimistic oracle model, verifying data through economic game theory rather than hardware investments.

Emerging protocols like API3 are also exploring decentralized API access solutions.

Different oracle projects are redefining the fundamental need of “information transmission” with their innovations. In this technological competition, which projects can truly become the information hub connecting blockchain with the real world remains to be seen by time and market.