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What Are Oracles in a Security Token Ecosystem?

With global regulators increasingly turning their attention to cryptocurrency, the licensed and regulated security token industry is on an ascent. Unlike traditional cryptocurrencies, security tokens represent existing financial assets, such as tokenized stocks and bonds, real estate, and precious metals.

Given the close connection with traditional assets, security tokens must be able to handle off-chain data involving real-world assets, providing a link between the blockchain and information outside of the blockchain.

Oracles Explained

Oracles form a bridge between the Internet, stock markets, and bank accounts, as well as a variety of other resources searching for the answer to a blockchain query. It quantifies that information before reconciling it to send to the blockchain for payment or verification.

Not to be confused with Oracle, the data management giant, an analogy of a (decentralized) oracle is sort of like a little octopus that has one arm in the blockchain with the other arms reaching out to the world through portals or nodes providing external information in response to a blockchain query.

There are several oracles that are available and many more that are being developed. Each oracle provider has its own unique way of determining if the data outside of the blockchain is credible and reliable.

How Can Oracles Help Security Tokens?

There are several types of oracles – software, hardware, consensus-based, outbound, inbound oracles, and many more.

Not all oracles are the same, so let’s categorize them into two distinct categories.

Key Takeaway

Most oracles generally have a similar goal of integrating real-world information in the blockchain. Oracles tend to work closely with security tokens due to their inherent features, including the need for several data points to the real world. They provide an innovative solution to accessing traditional financial assets through security tokens and tokenized stocks.

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