A system connecting both on-chain and off-chain systems. Blockchain Decentralized oracles are entities that connect blockchains to external systems. We’ll take a look at decentralized oracles and find out why they have immense importance in the crypto revolution.
The blockchain industry is currently dealing with the same interoperability problems that it industry did decades ago. Networks are incapable of connecting which leaves plenty of room for a bad user experience. On top of that blockchains can’t be directly connected with legacy systems of the financial world which significantly limits their usability and adoption rate.
This restriction is known as the “oracle problem” by specialists. Without any way to send data or pull data from external systems that are built outside the blockchain industry digital ledgers are isolated much like a computer without an internet connection. The oracle problem is a much more serious issue than anyone can possibly imagine, especially in light of the fact that the majority of smart contract use cases depend on interacting with the real world.
Oracles, but not just any oracles, have been developed by blockchain developers to address this problem. In this case, we’re talking about decentralized oracles. You most likely haven’t heard about the oracle problem before.
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We came to the conclusion that connections to the outside world are necessary for blockchain use cases, particularly those that rely on smart contracts. For instance, in order to determine settlements, financial smart contracts need to have access to market data. A blockchain-based smart city would need to connect smart contracts and a lot of data to regulating renting agreements the list goes on.
How does an oracle work?
In these situations, a blockchain infrastructure and a conventional infrastructure are not connected. We require a middleware service in order to connect the two and fill the gap. A system connecting both on-chain and off-chain systems. This piece of middleware is referred to as a blockchain oracle. Despite their complexity, oracles only have one job: to make the connection between centralized systems and blockchains. All oracles need to offer a specific list of features in order to make that possible and the most important ones are listed.
Listen Function
Listen is a function that allows oracles to monitor blockchain networks and check for incoming user requests or off-chain data.
Extract Function
The extract is a feature with which an oracle fetches data from external systems.
Broadcast
In order to send information to a smart contract, you can broadcast by signing and sharing transactions on a blockchain. An oracle needs to simultaneously support on-chain and off-chain systems in order to function. While one listens to establish connections broadcast data and extract information from networks the other processes requests retrieves data and sends blockchain data to off-chain systems.
Why oracles was not developed years ago?
Now if oracles are so crucial for interoperability why weren’t they developed years ago as always the problem begins with centralization. Prior to 2017, the majority of oracles or oracle prototypes were centralized. Due to the fact that deterministic transactions, or transactions that can be verified by all nodes, are the foundation of smart contracts. Running these oracles on networks like Ethereum was very unreliable.
A centralized oracle is similar to enterprise data and if we were to use it blockchains would lose their decentralization the moment they interact with an off-chain system. Instead of creating a middleware with the exact opposite format to preserve a fundamental aspect of the blockchain, developers have been working on decentralized oracles. The idea behind an oracle like this is to not rely on just one source. Instead, we increase data quality and authenticity by designing them to combine information from various outside sources.
Why do decentralized oracles matter?
A fairly good illustration of why having multiple sources of data is important is a liquidation cascade on a lending protocol compound that was scheduled to occur in November 2020. Users of Compound are able to borrow and lend money. When borrowing, collateral is required; if insufficient collateral is offered, the borrower’s assets are sold.DAI is a stablecoin that’s popularly used for loans and on one particular day, the tokens price suddenly increased by 30% on Coinbase pro.
Compounds price oracle at the time sourced prices solely from Coinbase pro and since the price surged borrowers found themselves with under collateralized loans which were quickly liquidated. The protocol had a total of 88.4 million dollars in liquidations that day. Not to mention the Defi project, dydx also suffered as a result but only lost 8 million. As we see crypto investors lost a total of 96.4 million dollars because of a rookie mistake. If the compound used a decentralized oracle that fetched data from multiple sources and aggregated it the lending protocol wouldn’t have registered dai’s price increase.
Without oracle’s blockchains would have a limited reach the decentralized networks of today would be like a computer or smartphone without an internet connection. We are unable to envision blockchain technology being helpful to anyone outside of its current community given that level of exclusivity. By providing a secure and trustworthy connection between on-chain and off-chain systems, decentralized oracles have come to the rescue. They not only connect the old and new ledger systems, but they also enable the connection to adhere to the fundamental principles of blockchain technology.
Related: What Is The Blockchain Trilemma?
Oracles are more crucial than ever, in particular now that all Defi projects rely solely on their use to collect price data, make settlements, and enable investors to trade assets. without using a traditional exchange. Some say that Defi wouldn’t hold its 75 billion value if it were not for oracles and We can conclude that decentralized finance did not exist prior to the development of oracle providers like a chain link. What are your thoughts on oracles? Tell us in the comments section below.
