What Is the Role of an Oracle in Settling a Smart Contract-Based Financial Derivative?

An Oracle is a third-party service that provides external, real-world data to a smart contract. For a financial derivative, this data is crucial for settlement, such as the strike price of an option, the reference interest rate, or the price of the underlying asset.

The smart contract cannot access this data directly, so it relies on the Oracle to feed verifiable, tamper-proof information. This external input triggers the contract's execution logic, leading to automated settlement.