A blockchain oracle is a third-party service for smart contracts. Oracles provide trusted information based on the outside-world sources to the on-blockchain smart contracts. An oracle typically encapsulates the real-world complexity outside of the blockchain. This provides different engineering advantages, chiefly that critical errors and potential points of failure are easier to mitigate off-chain than on-chain.

For example, in a contract to automatically purchase bitcoins at a predetermined price, the fulfillment condition is based on the current exchange rate for the bitcoin; an off-chain oracle can constantly monitor the price to provide the triggering condition to the contract.

If an oracle relies on a single source of truth (centralized), that can lead to issues: the data source can be hacked in a man-in-the-middle attack, or altered by its owner, in order to sway smart contracts. Decentralized oracles (consensus oracles) increase the reliability of the information provided to smart contracts by querying multiple data sources, thus distributing trust between participants. However, this does not achieve trustlessness, since oracles are not part of the main blockchain consensus, and thus not part of the security mechanisms of public blockchains.