The strengths of blockchain and smart contracts are manifold. However, they also suffer from some limitations that are inherent to the technology. There are many kinds of information we would like to be able to feed to smart contracts or store onchain. But blockchains themselves have no way to support verifying information from the outside - they must be printed to the chain and then trusted.
Oracle platforms allow this to happen without requiring you to trust the data provider. They do this by providing economic incentives, punishing bad information with confiscation and rewarding honesty with money. The exact mechanics to optimize this are subject to some debate, and we will go through various earlier implementations and mention what they did well, what did not work out, and what we have learned from their efforts. A number of issues remain, however, which earlier oracle platforms have failed to solve:
Lack of Interoperability: As the blockchain and cryptocurrency space grows, it is becoming clear that no one chain will be the only relevant chain for smart contracts and data marketplaces. While Ethereum has led the way and 2.0 is expected to alleviate high fees and congestion, the oracle platforms that serivce only Ethereum simply cannot compete in a market where data has to move between blockchains. In particular there is a lack of support for Polkadot, where we expect strong growth in the next few years due to its superior scalability and interconnectedness.
Narrow data specializations: Most oracle platforms support very limited data products, typically price feeds, with a few supporting other financial data. For oracles to enable unprecedented growth in the reach and capabilities of smart contracts, a wide range of data products must be supported, from weather data and the outcome of hockey matches to disaster verification and flight delays.
Reactive-only reputation systems: While most oracle platforms do have reputation systems, current implementations support only reactive penalties - attackers can build up a good reputation score and bide their time until they find an opportunity to provide false data at a critical moment, typically fake price feeds to profit off of a smart contract inocrrectly pricing assets.