In general, the quality of an oracle depends on its data source. Therefore, we can categorize oracle types based on their data sources, information flow direction, and the level of trust they represent.
Software Oracles
Hardware Oracles
Inbound Oracles
Outbound Oracles
Contract-Specific Oracles
Software Oracles
Software oracles handle information originating from online resources (e.g., databases and servers) on the internet. Since this information can be accessed in real-time via APIs, software oracles can continuously request and feed data. As a result, software oracles are the most common type of blockchain oracles.
Hardware Oracles
Hardware oracles refer to devices such as electronic sensors, monitors, and barcode scanners that can translate real-world events from the Internet of Things (IoT) into data on the blockchain. For example, a sensor can track weather conditions and transmit the data to the blockchain.
Inbound Oracles & Outbound Oracles
Inbound oracles enable smart contracts to receive data from the external world. Conversely, outbound oracles allow smart contracts to send data to the external world. For instance, when a blockchain address receives a certain number of tokens, it can trigger an action in the external world.
Contract-Specific Oracles
Contract-specific oracles are customized to provide information to a single smart contract. Although these oracles are costly to maintain, they serve specific use cases, offering developers a flexible environment where they can tailor the oracle according to certain requirements.
Conclusion
Oracles have become a critical component of internal and external communication in open networks. Today, large networks composed of diverse oracles support the functionality of many important crypto projects. Without oracles, DeFi projects would have to rely solely on information available within their own networks, severely limiting their capabilities in a multi-chain future (including cross-chain transactions).
For example, Injective relies on a decentralized set of oracles to provide the most accurate prices for trading markets. Thus, we collaborate with oracles like Band Protocol and Chainlink to deliver reliable sources of truth. It’s important to note that even in a decentralized environment, oracles are not entirely infallible. Therefore, blockchain projects must diversify the oracle networks they depend on to minimize the probability of errors. This is also one of the many reasons why Injective works closely with multiple oracle providers.
