If you have been following banking, investing, or cryptocurrency over the last few years, you may have heard the term “blockchain,” the record-keeping technology behind Bitcoin network and many other cryptocurrencies. Blockchain is a system of recording information in a way that makes it difficult or impossible to change, hack, or cheat the system. A blockchain is essentially a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems on the blockchain.
Blockchain has seen a staggering rise in popularity since Bitcoin, the first cryptocurrency, launched in 2010. Blockchain has several advantages, including decentralisation and security. The demand for a decentralised currency has catapulted Bitcoin and other cryptocurrencies to worldwide popularity; however, blockchain has its limitations. These systems are inherently closed off from the rest of the world, which is good for security and integrity but also limits the data they can accept. Hence, the need for a sort of bridge that can help these systems see what is happening in the outside world. But for the system to work, the input cannot come from a single source, since that would then rely on a centralised source of data, which goes against the very nature of blockchain.
Smart contracts are pre-specified agreements on the blockchain that evaluate information and automatically execute when certain conditions are met. These smart contracts help the system respond to a wide range of input. The first cryptocurrency, Bitcoin, and its corresponding blockchain can only process a small range of this input. But newer blockchains, such as Ethereum, have a wider range, which includes support for programmable smart contracts.
Crowdfunding is a good example: if a certain amount of ether is deposited into a smart contract by a certain date, then payment will be released to the fundraiser - if it is not, then payment will be returned to the donors. Because smart contracts exist on a blockchain, they are immutable (can’t be changed) and verifiable (everyone can see them), guaranteeing a high level of trust among parties that they accurately reflect the stated parameters of the agreement and will execute if, and only if, those parameters are met.
For smart contracts to craft agreements beyond those that pertain to data found on the blockchain, they require off-chain data in an on-chain format. The difficulty in connecting outside information sources to blockchain smart contracts in a language that they both understand is one of the main limitations in how widely smart contracts can be used.
This is where oracles come into play. An oracle is a type of software known as ‘middleware’ that acts as an intermediary (middle man), translating data from the real world to smart contracts on the blockchain and back again.
Disclaimer: This article is meant to provide general guidance and understanding of cryptocurrency and the Blockchain network. It’s not an exhaustive list and should not be taken as financial advice. Yellow Card Academy is not responsible for your investment decisions.
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