One of the definitions of an oracle is “A person or thing regarded as an infallible authority or guide on something.”
In a town, a man walks his dog at 9:00 AM every morning. No matter what. His dog-walking schedule is so consistent that the townspeople rely on it to know what time it is in the morning. If the man is walking his dog, it must be 9:00 AM!
This man, whether he knows it or not, is an oracle.
How reliable is this man as an oracle? What if he gets sick, the dog runs away, or it rains? These could all interrupt his schedule and no longer make him a source of truth for when 9:00 AM is.
The idea of oracles originated in ancient times with Greek mythology. An oracle was a being who would act as a bridge from the people to the gods, and would share knowledge of the future. The act of receiving this information is also known as divination.
Though various different methods were adopted for divination, the idea of an oracle has remained the same.
Vocabulary.com states that “In modern usage, any good source of information can be called an oracle.”
The blockchain is a wonderful tool for keeping track of everything happening within its network. That said, blockchains require a method of verifying data that doesn’t originate from themselves.
How does a blockchain know the price of a token? How does a blockchain know the results of the presidential election? How does the blockchain know what color the sky is?
The blockchain needs a source of truth — an oracle.
Why does the blockchain need to know the answer to these questions in the first place?
A smart contract needs to know the answers to questions so it knows what to do next. A prediction market contract needs accurate results so it knows who to reward. A lending contract needs the latest price of a token so it can request and return the proper amount.
Why not use a reliable outside source for all these questions?
This is the whole problem. What would a reliable source look like? It would be likely that this is a centralized outside source, and proving the reliability and perpetual accuracy of this source would become problematic.
There are a few teams trying to solve this.
Augur is one of the bigger players in this space working on an oracle for their prediction markets. Augur allows users to vote on what the true result of a scenario is, and dispute that result if they believe it’s incorrect. This would be crowd-sourcing results and is a democratic way of finding the truth.
Another solution is Chainlink, which is a project that is creating a decentralized oracle network. This oracle network allows smart contracts to access off-chain data feeds. These data feeds can be separate blockchains or standard data feeds like web APIs. An example of this is if the stock market had its own blockchain — other blockchains would access its data via Chainlink and use it as an oracle.
While every oracle is a source of truth, that truth may not always be the real truth.
There have been a handful of incidents of oracle exploitation, resulting in loss.
Synthetix had an incident where their oracle reported a price for the Korean won that was 1000x what it should have been. A trading bot detected this pricing error, took advantage, and made trades that resulted in 1000x profit. That bot profited over $1 billion in less than an hour.