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What are ‘Oracle’ Cryptocurrencies?

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We all know about Bitcoin and Ethereum. But what about the other thousands of cryptos out there? Surely, they can’t all serve the same purpose as Bitcoin, and some do- but most don’t. Cryptocurrency is an umbrella term that encompasses several different types of blockchain technologies, which Guy over at the Coin Bureau does a great job of categorizing. Here are the seven major categories for cryptos, with a sentence or two to describe each:

  1. Store of Value Cryptos– These are designed to do just that, maintain value or even increase the purchasing power of the holder of the coin over time.
  2. Smart Contract Cryptos– These are cryptos that aim to make financial services and digital applications decentralized, and have a great number of potential uses. 
  3. Oracle Cryptos– These allow real-world data to be imported into smart contracts. Oracle cryptos are likely to grow alongside smart contract cryptos because the two rely upon each other to function. 
  4.  Payment Cryptos– Given the level of technology available to us today, cross-border payments are painstakingly slow and expensive. Payment cryptos offer a solution to that- It takes only seconds to transmit or receive at a fraction of the cost of what financial institutions charge today.
  5. Privacy Cryptos– There’s a big rub with decentralized: most transactions happening on any decentralized apps or crypto networks are publicly viewable in real-time. Privacy cryptos solve this problem. 
  6. Exchange Tokens– Coins like this are probably the most comparable to stocks or equities. Holding an exchange token is much like owning part of an exchange like Binance or Uniswap. 
  7. Memecoins and Shitcoins– These are the most volatile and dangerous of all cryptos. These coins exist for no other reason than to make their founders and largest holders rich, and serve no real-world purpose and provide no value.

In this article, we’ll be covering oracle cryptos, their purpose in the blockchain space, and a few of the top oracle cryptos on the exchanges today. Oracle cryptos are going to play a key role in blockchain technology gaining more global adoption- which is why they’re part of my coin portfolio.

What is an oracle crypto?

If the 2010s were the coming-of-age decade of Bitcoin and the store of value cryptocurrency, the 2020s will surely be the coming-of-age decade of smart contract cryptocurrencies. As smart contract cryptocurrencies like Ethereum, the Binance SmartChain, Avalanche, and Polkadot grow, oracle cryptos will grow right alongside them. This is because in order for smart contracts to execute and solve real world problems, real world data has to be brought in. Oracle cryptos bring in this real-world data in a decentralized fashion, which is important. The Bitcoin and Ethereum networks have lots of information inside of them, but none of that can be real-time real-world data without oracle cryptos. 

It starts with decentralized applications (dApps)

Perhaps blockchain’s biggest advantage and selling point is that it is decentralized. This makes the network extremely economically expensive and nearly impossible to hack. Networks like Ethereum and Cardano host decentralized applications, or dApps. Right now, most of us use centralized applications for everything- which usually means agreeing to privacy policies and letting big tech companies harvest and sell your data so you can get highly targeted Hyundai ads. The biggest tech companies are worth $2 trillion dollars for a reason- they act on behalf of their own interest, and not yours. That same data they own can be hacked and stolen, or the network that runs the app could crash. But it doesn’t have to be that way. dApps offer solutions to these problems and often offer better performance, since entire networks of users own, develop, and run applications. 

A decentralized approach to real-world information

In order for smart contracts to run on decentralized platforms, real-world data needs to be introduced. For example, let’s say on the Ethereum network a smart contract has conditions that money needs to be paid in fiat, and one sender is sending in Dollars and the recipient is receiving in Euros- we would need to know the current exchange rate. In the old conventional Web 2.0 world of centralized apps, real-world data are often brought in with application programming interfaces (APIs)- so an API from a money exchange like Western Union is called and the exchange rate provided- let’s say it’s $1.15 to 1 Euro. But there’s trouble with this- it’s centralized. What if the Western Union API is compromised or inaccurate? Also, when smart contract confirmations have to be made on different nodes across the network and those nodes all the API, the exchange rate probably will have changed, say to $1.20 to 1 Euro. No consensus is reached on the network, and chaos ensues. 

Oracle cryptos offer the solution 

Instead of calling the Western Union API to get an exchange rate from a single source, an oracle cryptocurrency like Chainlink can come in and gather exchange rate information from hundreds of sources and provide a range to the smart contract on the Ethereum network, say at $1.10-$1.30 per Euro. Chainlink itself uses a consensus algorithm (decentralized) to decide what the exact exchange should be, and confirms this with the other nodes on the network. Voila! Real-world information is brought onto a smart contract network like Ethereum in a decentralized manner so contracts can execute. Oracles can deliver information from the physical world as well- for instance, with supply chain management. Did a train arrive with a certain set of goods on time? Obviously, security around such data is important. 

Oracle tokens

Much how like Ethereum is a network and not a cryptocurrency, Chainlink is a network and not a cryptocurrency. Both networks have tokens (which are LINK and ETH in this case) that are used to power the networks. Think “gas fees” for Ethereum transactions. All of these smart contracts executing require an immense amount of decentralized computing power, and tokens are the currency which can pay for the network power to execute your contracts.

Examples of oracle cryptos

The most obvious and well-known oracle crypto is Chainlink, whose market cap exceeds 90% of the total market capitalization of all oracle cryptos. Chainlink has been in the top 20 cryptocurrencies for years, and has significant adoption with multiple smart contract networks. The good news is that as smart contract cryptos grow, oracle cryptos will grow alongside at a near 1:1 rate. The catch is that there are many oracle cryptocurrencies, and any one of them could come online with some distinct advantage. Other big oracles include Band Protocol, WINKkLink, and API3. 

The future of oracles

Opportunity with oracle cryptos isn’t just limited to smart contract networks- a consensus-driven approach to gathering real world real time data could provide immense economic value from supply chains to finance. For this reason, and because it has 90%+ of the oracle crypto market cap, Chainlink is indeed part of my portfolio. As always I’ll have my eyes out for other oracle cryptos that can add value in unique ways.

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