The Oracle Problem
One of the major issues with blockchain technology and smart contracts is the inability to naturally connect to external data sources. As most world data remains off-chain, blockchain networks are facing an uphill battle in generating real-world applications. The second part of the problem is blockchains need to be able to trust the validity of off-chain data and know it hasn’t been tampered with.
Oracles alleviate the oracle problem by bridging the gap between the off-chain and on-chain worlds. Put differently, Oracles are digital entities that connect blockchain networks to different data sources. These data sources can be on-chain or off-chain; they can connect to traditional databases or application programming interfaces (APIs), as well as blockchain native sources. Similar to APIs, blockchain oracles serve as a way for different data sources to communicate between each other. Decentralized oracle networks (DONs) enable the implementation of trustless smart contracts by ensuring data availability, validity, and off-chain computation.