What Is an Oracle Coin?

Some digital coins fill very specific roles in the cryptocurrency industry. An oracle coin, for example, is a highly specialized token that feeds real-world information into smart contracts. Here's how it works.

Different cryptocurrencies lying in a pile atop a smartphone opened to a trading app. — Image source: Getty Images.

In the context of cryptocurrencies and blockchain systems, an oracle provides an interface between blockchain networks and the real world. An oracle coin is a cryptocurrency token that carries this data over an oracle network to where it is needed. Smart contracts can tap into this resource to read data from various sensors and measurable conditions. This way, the oracle coin's information can trigger transactions within the smart contract.

Smart Contracts

Programs written on the blockchain that self-execute when certain conditions are met.

This role is crucially important to smart contracts. Without oracle coins, smart contract platforms such as Ethereum (ETH -1.31%), Solana (SOL +2.10%), and Cardano (ADA -0.44%) would be limited to taking action exclusively on data that is available within the cryptocurrency itself. That would be a closed system, and oracle coins open the door to lots of alternative data sources.

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Why are oracle coin data feeds so important?

A smart contract uses a full-featured programming language to set up conditions to trigger various actions. For instance, a smart contract could keep tabs on a sportsbook bet. Let's say the Giants cover the spread. The smart contract automatically sends token-based money your way in this case. If not, the blockchain-friendly bookmaker gets paid instead.

However, this is only possible with the help of oracle coins. The dominant Chainlink (LINK -0.73%) oracle coin offers data feeds from several real-time sports score providers. Oracle data from score-and-statistics expert services will tell the bookmaker's smart contract what happened. This is a highly automated way to run a betting service -- or to service insurance claims, or order more fertilizer if the weather oracle shows a rainy season, to name a few options.

And none of these actions can happen without a trusted oracle coin such as Chainlink. For a modest fee, the oracle network manages relationships with real-world data sources and delivers the right data to your smart contract as needed. Without that service, it's impossible to run smart contracts that refer to real-world data. And that includes many surprising data points. For example, the Ethereum network itself doesn't know anything about the Ethereum token's market price. You'll need an oracle coin to carry market prices into a decentralized finance app because the crypto-trading market is entirely separate from the inner workings of the blockchain ledgers.

How can oracle coins help investors?

Oracle coins can help investors in two important ways.

First, you can invest in oracle coins if you expect them to become more important over time. Those minuscule fees per data feed can add up when you're looking at millions of people using a popular app or service. Chainlink is the only oracle option worth mentioning so far, but other alternatives could bubble up anytime.

The other option is to make use of oracle-powered financial services. This idea could gain traction as the ideas of decentralized finance (DeFi) and Web3 content management go more mainstream. One fine day, smart contracts might give all of us the power of ultra-automated trading systems. If that's where we're going in the long run, just remember that no action can be the best action, and master investor Warren Buffett often says that "sitting on his hands" is the real secret to his success. Just because we can set up sophisticated trading patterns doesn't mean that we should.

In a nutshell, oracle coins are the unsung heroes of the smart contract world. They bridge the gap between blockchain networks and real-world data, making it possible for smart contracts to interact with everything from sports scores and weather data to market prices and Internet of Things sensors.

As decentralized finance and Web3 technologies continue to mature, the importance of these specialized tokens is only going to grow. So keep an eye on this space. Decentralized finance and other emerging systems can't work without it.

About the Author

Anders Bylund is a contributing Motley Fool media and technology analyst covering semiconductors, cloud computing, internet infrastructure, quantum computing, and streaming media. Previously, Anders was a systems administrator for Nielsen Technology and CSX, gaining hands-on experience with enterprise-class systems. He was also a freelance writer for Ars Technica, TIME, USA Today, CNN, WIRED, and AOL's Daily Finance. He holds a bachelor’s degree in English and a master’s degree in library and information sciences from Florida State University. He believes in coyotes and time as an abstract.

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Anders Bylund has positions in Cardano, Chainlink, Ethereum, and Solana. The Motley Fool has positions in and recommends Chainlink, Ethereum, and Solana. The Motley Fool has a disclosure policy.