What is an Oracle? Chainlink and Band Explained
|— Oracles are services that are used to securely supply reliable data from the real world to smart contracts.|
— Chainlink and Band Protocol are the two most well-known blockchain-based oracle providers—both were founded in 2017.
— Information from oracles is currently used in a massive range of applications, many of which fit squarely into the decentralized finance (DeFi) niche.
When you think of the word oracle, what comes to mind? An ancient soothsayer draped in silk that provides counsel to the kings and queens of old? Or maybe simply a person with great wisdom to share?
Well, when it comes to cryptocurrencies and blockchains, these descriptions aren’t too far from fact—albeit a bit less dramatic.
So, what are Oracles exactly?
In essence, oracles are a new type of technology that can take information from a data source and securely send it to one or more smart contracts—a fancy term that describes digital contracts that can automatically carry out the terms of agreement written down in code.
The data and their source can be practically anything of interest, such as the price of certain goods or commodities, temperature data from a weather sensor, election results, and more. The smart contracts that request and receive this data can then use it to carry out their function.
These oracles give blockchains a way to communicate with the real world for the first time, enabling a huge range of new applications, since smart contracts can now work with data from the real-world whereas before they were seriously restricted in the information they could access and use.
It also works the other way around. Oracles can also take information from a blockchain like Ethereum, and securely send it to external applications, allowing individuals and businesses to safely and reliably access blockchain data if needed.
Two Oracles: Chainlink & Band
Recognizing the need for reliable data inputs and outputs for smart contracts, Chainlink was the first major oracle network to launch. It’s also by far the most widely used oracle platform, with Chainlink oracles now being used by hundreds of projects.
But Chainlink isn’t the only one looking to help bridge blockchains with the real world via oracles. Band Protocol, the second-largest player in the decentralized oracle space, was also founded in 2017 but didn’t launch version 1.0 of its data oracle platform until September 2019.
Although Chainlink got a head start, Band Protocol has also gone on to achieve great success.
Like Chainlink, Band Protocol aims to provide high quality, tamperproof data to smart contracts by using oracles. After all, if the data isn’t reliable or accurate, it probably isn’t of much use to anyone. It also positions its oracles as cheaper, faster, and easier to use than Chainlink’s.
One major difference between the two is that Chainlink is built on the Ethereum blockchain, whereas Band Protocol was originally based on Ethereum, but recently moved to Cosmos. Different blockchains have different features and Cosmos helps Band Protocol keep costs down when sending or receiving data.
In any case, the integrity of any data fed to an oracle is always checked before it is passed to any smart contracts. This is a necessary step, since smart contracts are often responsible for managing large sums of cryptocurrency, and need reliable data to function properly.
For both Chainlink and Band Protocol, operating an oracle or being a data provider can be a profitable business, since they earn LINK or BAND respectively for providing their services. These tokens have value and can be easily swapped for other cryptocurrencies and regular cash.
How Oracles are used today
Let’s take a look at a quick example to see how oracles and smart contracts might work together in a real-world scenario.
Suppose Alex and Maria want to bet on what the price of Bitcoin (BTC) will be five years from now. Alex is bullish on Bitcoin and believes it will climb to over $100,000 by the agreed date, whereas Maria is bearish, and believes Bitcoin will fall to under $20,000 instead.
The two agree to wager $1,000 each on the outcome—whoever’s closest wins the pot! They set the terms of their agreement in the smart contract and deposit their wager. Without oracles, the smart contract would not be able to check the price of Bitcoin on the specified date.
But when connected to an oracle, the smart contract can simply query the oracle when needed, and receive information on the price of Bitcoin from a reputable source. Based on this data, it could then settle the bet and automatically transfer the funds to the winning party.
In other words, oracles are like the waiters at a restaurant. They’re an essential intermediary between the customers (the smart contracts) and the chefs (the data providers). Without the waiters, customers can’t easily communicate with the chefs and vice-versa. In an ideal world, customers would only deal with the waiters that choose the best chefs.
Chainlink & Band: what is their mission?
Depending on your experience with decentralized applications—essentially programs that run on a blockchain—you may have already seen the benefits of oracles first hand. Right now, they’re being used to enable a huge range of services, some of the most popular include:
- Decentralized Finance (DeFi): This is a new range of decentralized financial products that provide services similar to those typically offered by regular financial institutions—like insurance, trading services, and lending/borrowing.
- Price feeds: Some oracles are used to provide reliable price data, allowing smart contracts to easily query the price of an asset to work out exchange rates for things like regular currencies, commodities, stocks, and cryptocurrencies.
- Synthetic assets: Synthetics are cryptocurrency tokens that represent another asset, like a stock or commodity. Oracles are needed to ensure their value closely matches that of the underlying asset.
For an in-depth look at some of these, see Chainlink’s recent report. But be warned, it does get a little technical.
Oracles are quickly becoming a cornerstone technology for the blockchain industry, so odds are we have only scraped the surface when it comes to seeing their true potential and utility.
Knowledge is power – so keep on learning! If you enjoy getting to grips with crypto and blockchain, check out our School of Block video Intro to Web 3 for Beginners.