What Is an Oracle in the Context of Decentralized Financial Derivatives?

An oracle is a third-party service that securely brings real-world data, such as asset prices, interest rates, or market volatility, onto a blockchain. For a decentralized options contract, the oracle provides the crucial price feed at the option's expiry, which the smart contract uses to determine whether the option is in-the-money and calculate the final settlement.

The security and reliability of the oracle are paramount to the integrity of the derivative.