What types of oracles do we know?

In general, hybrid smart contracts need different types of external data, computation, require different delivery mechanisms and different levels of security. Each type of oracle involves a certain combination of data fetching, verification, computation, and delivery to the destination.

Input oracles

These are the most widespread type of oracles. They extract data from the real world (off-chain) and deliver it to the blockchain network for smart contract requirements.

Output oracles

These are exactly the opposite of input oracles. These allow smart contracts to send commands to off-chain systems because of which they receive a signal to perform certain actions. For example, this could be informing a banking network to make a payment, or commanding a storage provider to store the delivered data.

Cross-chain oracles

This type of oracles can read and write information between different blockchains. Cross-chain oracles enable interoperability to move data and assets between blockchains, such as using data on one blockchain to trigger an action on another, or bridging assets across chains so that they can be used outside of the native blockchain on which they were issued.

Compute-enabled oracles

A new type of oracles which is being increasingly used in smart contract applications. These oracles use secure off-chain computation to provide decentralized services that are impractical to perform on-chain due to technical, legal, or financial limitations.

What pros do oracles bring?

• They extend the functionality of the blockchain. Oracles provide blockchains with the external data needed to perform complex tasks. Instead of a blockchain being limited to a single network, oracles allow it to interact with external data. Thanks to oracles, we can use the blockchain for everyday activities.
• Oracles have almost no limitations in their configuration, which means they are very flexible. You can configure oracles to perform almost any task you want. Depending on your needs, oracles can repeat an action or perform it only once.
• They save time and effort. The big advantage of oracles is that they don't require you to manually perform transactions on a blockchain. Instead of sitting and performing various tasks, you can let oracles solve things for you. Even if they can't manage complex situations, they can perform simple transactions without requiring your constant oversight.

Even oracles are not perfect, and using them has its cons.

• Incorrect data can lead to fatal errors. Oracle is only as reliable as the data it receives. If oracle receives incorrect information, whether because of innocent mistakes or malicious acts, it can end very badly for investors who expect truthful data.
• Third party. Oracles are never built directly into the blockchain. This process requires the involvement of a third party, which can cause decentralization issues.

What challenges do oracles face?

The main definition of the quality of a blockchain such as Ethereum is that it is capable of running smart contracts. Once programmed, smart contracts are fully controlled by the blockchain. This means that it does not have to trust any entity and no one can prevent a transaction from taking place, assuming the conditions in the smart contract are met. The way it works is that the contract is doing what it is programmed to do.

However, even though the goal of blockchains is to move away from third parties, they have to use oracle technology that is powered by an entity. The oracle is the data channel that feeds data into the blockchain, and this trust in the source of that data can lead to problems. It may happen that the owner of the oracles data channel releases inaccurate data in order to change the behavior of smart contracts in their favor, or a hacker takes advantage of a flaw in the data channel and alters the incoming data.

Developers are still trying to figure out how to mitigate this problem and make oracles more decentralized and secured against hackers and other bad actors in the market.

Conclusion

Oracles, as a reliable mechanism that facilitates communication between smart contracts and the outside world, are vital to the global adoption of blockchain. Without oracles, smart contracts would only have to rely on the information already contained in their networks, which would severely limit their options.

Oracles are still a problematic building block. Further work will need to be done to implement them in a one hundred percent secure, reliable and trustworthy way. If this can be done, blockchain will be one big step closer to global adoption.

Personal Opinion

Oracles are a great technology that make blockchain gain in functionality to a great extent. Thanks to oracles, we can connect the real world with the blockchain world in real time. The oracle technology can bring many positive milestones to the world of cryptocurrencies.
But beware! The article mentioned a few cons that oracles still face. Until this technology is well thought out enough, it can bring a lot of sorrow to the lives of crypto-investors aside from the benefits.
Imagine that you are relying with a majority of your investment on a lending project that is dependent on oracle data. If due to a bug in oracles this data changes extremely, just for a few minutes, you get liquidated and all your money is gone. So remember to diversify your investments enough and before every investment do a thorough DYOR!