Smart contracts power complex applications, like multi-billion-dollar collateralized lending protocols or prediction markets. But much of this activity relies on external data, and most blockchains cannot scrape data directly from the wider internet. To do so, they must rely on intermediaries, known as oracles.
Oracles are programs that feed smart contracts with real-world data about things like weather, election outcomes, and stock prices. They do not form part of the blockchain but can be “called” by smart contracts.
Oracles do not just fetch whatever data they find and submit it to smart contracts. They act as trusted bridges between blockchains and the real world by querying, verifying, and authenticating data sources.
Chainlink is the largest oracle, commanding almost half of the oracle market. The value of all tokens locked within protocols that rely on Chainlink is about $12 billion. Chainlink is commonly used to feed smart contracts with data based on real-time crypto prices and to help Web3 games generate random numbers.
MakerDAO, which long relied on its own oracle, integrated Chainlink in 2023 to inform its protocol about when it should liquidate a borrower and how much Dai its vaults can generate.
Poorly designed oracles can pose security risks. Many lending protocols in DeFi use custom price oracles that are not always audited or battle-tested. They often become targets for attackers, who manipulate their mechanisms by siphoning money while pretending to be legitimate borrowers—effectively scoring free money.
Go deeper:
77-plus smart contract use cases enabled by Chainlink
So you want to use a price oracle—samczsun (leading DeFi researcher)
See also:
What Is Ethereum?
What are DEXes?
What is DeFi?
Try it:
Ethereum Liquidations (enabled by oracles)