Blockchain is often described as a closed, self-contained system. It is reliable, transparent, and independent from intermediaries, but this autonomy has a downside: by itself, blockchain does not know what is happening outside its network. It cannot see the Bitcoin exchange rate on trading platforms, does not know the price of Ethereum at the moment of a transaction, cannot track changes in liquidity in a DeFi pool, and cannot independently verify whether a token has reached a specified price level.
This is where oracles come in — technologies that connect blockchain with the outside world. Without them, smart contracts would remain digital mechanisms locked inside the network. With oracles, they gain access to real-world data and can interact with markets, events, and assets in real time.
Why blockchain needs oracles
A smart contract is a program that automatically executes the terms of an agreement. However, in order to make decisions, it often requires external information. For example, a lending protocol needs to know the current price of collateral assets, a decentralized exchange requires the market rate of a token, and a prediction market needs the result of an election or a sporting event.
The problem is that blockchain cannot simply “go online” to retrieve this information. External sources are not part of its decentralized network, which means data from them must be collected, verified, and delivered in a secure format.
This is the role of oracles. They act as intermediaries between the blockchain and the real world: gathering data from external sources, processing it, and transmitting it to smart contracts.
Where oracles are already used
Today, oracles are among the least visible but most critical elements of crypto infrastructure. They are used by decentralized exchanges, lending protocols, NFT marketplaces, GameFi projects, and prediction markets*.
* Prediction markets are platforms where users make forecasts about the outcomes of future events by buying or selling special contracts. The price of these contracts changes depending on the probability of the event occurring. For example, participants may predict the victory of a candidate in an election, a U.S. Federal Reserve interest rate decision, the price of Bitcoin by a certain date, or the result of a sports match. If the event occurs, users receive payouts. One of the best-known cryptocurrency prediction markets is Polymarket.
It is thanks to oracles that DeFi protocols know the value of ETH, BTC, or a stablecoin at any given moment. NFT platforms can account for external events, gaming projects can record match outcomes and player actions, and prediction markets can calculate payouts based on real-world events.
However, cryptocurrency prices are not the only data oracles can deliver. They can also transmit information on weather conditions, interest rates, inflation, stock and bond prices, real estate values, logistics, insurance events, and data from IoT devices (Internet of Things).
This is why oracles are especially important for the tokenization (issuance on blockchain) of real-world assets (RWAs)*. If stocks, bonds, real estate, or commodities are issued as tokens, the blockchain must constantly receive reliable information about their value. Without oracles, such a connection with traditional financial markets would be impossible.
* RWA (Real World Assets) are real assets represented on blockchain in the form of tokens. Tokenization enables the “digitization” of traditional assets and their use within crypto infrastructure. For example, U.S. Treasury bonds, real estate, gold, company shares, or commodities such as oil, coffee, and grain can all be issued as tokens. The holder of such a token receives rights associated with the underlying asset. For instance, a tokenized bond issued on blockchain may generate returns similar to those of a traditional government bond.
Centralized and decentralized oracles
Oracles can be centralized or decentralized.
A centralized oracle relies on a single data source or is controlled by one organization. This approach is technically simpler but creates an obvious risk: if the source makes an error, is hacked, or manipulates information, all protocol users may suffer the consequences.
Decentralized oracles are more complex. They collect data from multiple independent participants, compare the data, and transmit the result to the blockchain only then. This approach reduces the risk of errors and makes the system more resistant to manipulation.
How oracles emerged
The first simple oracles appeared back in 2012 and transmitted Bitcoin price data to the blockchain. However, they became a truly important part of the industry later, after the 2017 crypto boom and especially during the rapid growth of DeFi in 2020–2021.
It was then that the industry realized: if decentralized finance wants to compete with traditional markets, it needs fast, reliable, and secure data providers.
Weaknesses of oracles
The main challenge with oracles is the trustworthiness of the data they provide. A smart contract automatically executes predefined conditions. It does not determine whether the data source made a mistake, whether the market was temporarily distorted, or whether someone intentionally manipulated the information.
If an oracle transmits incorrect pricing data, the consequences can be severe: improper liquidations, unfavorable trades, trader losses, and protocol malfunctions.
Such incidents have already occurred. In 2019, an error in Synthetix's pricing data enabled trading bots to profit significantly from incorrect exchange rates. In 2024, the UwU Lend incident demonstrated how dangerous asset price manipulation can be when a protocol relies on vulnerable data sources.
Another issue is the speed of data updates. In DeFi, even a small delay can matter. If an asset price changes but the oracle transmits outdated information, the smart contract may make an incorrect decision.
This is why modern oracles are developing different operational models: some regularly update data through subscription feeds, others provide information on demand, while some focus on ultra-fast price delivery for trading applications.
Major players in the oracle market
The best-known player in this segment is Chainlink. It is the largest oracle network, and its data is used by leading DeFi protocols, including Uniswap, Aave, Lido, and Polymarket. Chainlink also works with major traditional financial institutions, including SWIFT*, Mastercard*, UBS*, and Euroclear*.
* SWIFT is an international financial messaging system used by banks around the world to exchange information about payments and transfers. SWIFT does not store customer funds; it provides infrastructure for secure payment messaging. For example, when a person sends an international bank transfer from one country to another, banks often use the SWIFT network.
* UBS is the largest bank in Switzerland and one of the world’s leading financial groups. UBS provides investment banking, asset management, and wealth management services. The bank explores blockchain technologies, asset tokenization, and the use of crypto infrastructure in traditional finance.
* Euroclear is an international clearing and settlement system that processes securities transactions. The company helps banks, funds, and other financial organizations manage transactions involving bonds, stocks, and other assets. For example, when a large investment fund purchases government bonds from another country, settlement and custody of those securities may be handled through Euroclear.
Bittensor represents a different approach: it is a decentralized network focused on artificial intelligence and machine learning. It connects suppliers and consumers of AI models, expanding the concept of oracles beyond traditional price feeds.
Pyth Network focuses on speed. The project specializes in high-frequency market data transmission and is particularly popular among trading platforms and DeFi applications that require rapid price updates.
Why oracles matter for the future of crypto
Oracles are not the most visible part of the crypto industry. They receive less attention than Bitcoin, memecoins, or new blockchains. Yet without them, most of today’s decentralized economy simply could not function.
They transform blockchain from a closed database into a tool that can interact with the real world. Thanks to oracles, smart contracts can take into account market prices, real-world events, economic indicators, and traditional financial data.
As DeFi, tokenization of real-world assets, and blockchain infrastructure continue to develop, the role of oracles will only grow. The more the real world moves into digital assets, the more important a reliable bridge between these two environments becomes.