In a world of “interests,” it is vital that no one has a monopoly on truth.
Decentralized protocols have grown in popularity as viable alternatives to traditional centralized systems. People are recognizing the flaws of centralized authority and adopting open, decentralized, and trustless systems. However, for decentralized protocols to truly be open and transparent, there’s a need for an infrastructure that would help access offline real-time information in a trustless manner.
There is no doubt that we live in a world where anyone can simply share false information and declare it to be true. Oracles appear to be the solution to the emerging decentralized web’s “infrastructure” dilemma. Oracles are essential blockchain infrastructure that facilitates communication between the offline and on-chain protocols.
Oracles are essential for most decentralized protocols, particularly Decentralized Finance. Decentralized Finance (DeFi) protocols rely on Oracle networks for real-time on-chain data and event-based outcomes because blockchains have no native way to access data outside of the chains themselves, and decentralized applications (dApps) such as insurance products, algorithmic stablecoins, financial derivatives, and prediction markets, must function smoothly.
Oracles gather real-world data from external sources, such as market prices, weather data, location data, and currency rates, and place it on the blockchain, allowing smart contracts to act on it. They can even provide data from different chains.
When a protocol is not decentralized, oracles are frequently third-party services or application features that a user interacts with manually. These do not adhere to the notion of decentralized protocols and are, for the most part, centralized. Centralized oracles could be readily controlled and utilized for selfish purposes. The purpose of blockchain oracles is to provide numerous reliable data sources in order to achieve complete decentralization.
To achieve this, blockchain oracles combine cryptography and incentives to build systems that allow different nodes to reach a consensus over shared data. However, this may result in weakness for decentralized protocols. Manipulation can occur when utilizing common price-feed oracle systems, and there have been multiple high-profile incidents, one of which was when lenders on DeFi platform Compound were liquidated for US$103 million due to a malicious oracle exploit. The failures of 3AC, Celsius,…
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