An oracle is an entity that serves as a bridge between a blockchain and the real world in a decentralized system. Its functions include determining the results for smart contracts.
Understanding the term
From the oracle definition, it is clear that this particular entity gives data to smart contracts so that they execute their contracts based on predetermined conditions. Furthermore, oracles have access to many blockchain-based products as it allows blockchain to communicate and connect with off-chain data in a comprehensive way. But one should not confuse oracles with data sources.
Without a connection with the external system, it is impossible for a blockchain to advance, which is exactly why oracles exist. The best thing about an oracle is that it enables a decentralized web3 ecosystem to interact with legacy systems, advanced computation methods, and data sources. The oracle problem in blockchain fundamentally limits smart contracts. Oracles can be categorized depending on their source of data, which can either be hardware or software and also the destination of data, whether it is input or output.
Due to the expansive nature of off-chain resources, oracle capabilities are many, including validation, verification, query, and collection of data from various sources before delivering it to smart contracts.