Some of my earlier storytelling attempts followed the latter approach. To bad effect.
Prophecy can serve a lot of purposes, especially in a story where the relationship with the divine is more direct. It can be as literal as the gods themselves serving the Wise Mentor role, telling the protagonists what they need to do. Or it can be a test from the gods, to see if the characters can figure out what they are supposed to do.
Now, being a bit of a classicist, I'm quite fond of the misunderstood prophecy. Now, the most traditional form of this is one where someone hears a prophecy, and their actions to avoid it cause it to happen. Oedipus's father leaving baby Oedipus in the forest to die being the most famous example.
But the other form of it is the one I really love, where the prophecy seems to be telling the protagonist the thing they want to hear; for example, Macbeth believes he cannot be defeated once he hears that "no man of woman born can harm Macbeth".
Of course, Macbeth wasn't being told he couldn't be defeated. He was being told the explicit circumstances of his defeat:
Thou losest labour.
As easy mayst thou the intrenchant air
With thy keen sword impress as make me bleed.
Let fall thy blade on vulnerable crests;
I bear a charmed life, which must not yield
To one of woman born.
Despair thy charm,
And let the angel whom thou still hast served
Tell thee, Macduff was from his mother's womb
Whoops. Walked into that one.
Of course, the big questions you should ask yourself is, does your story need prophecies? Or are you using it because it is an expected trope in fantasy?
*- While the third season of Babylon 5 is largely excellent, there probably was no scene more awkward or painful than the bit in "Shadow Dancing" when a few characters hash out the imagery of Sheridan's dream, scene by scene.