For the past 18 months, decentralized finance (defi) has become a thriving alternative to the legacy banking system, an open and unreliable sector with a valuation of nearly $ 200 billion comparable to the GDP of many nation-states. When ranked based on this, defi is currently just outside the top 50.
Decentralized applications (dApps) that span the entire decentralized landscape like endless tentacles allow anyone in the world to use digital assets to lend, borrow, store, trade, and more without permission. All you need is a Web3 wallet compatible with internet connection. The days when you had to make an appointment with a bank manager to open an account or apply for a loan seem to be ancient.
Much of Diffi’s soaring achievement lies in the Ethereum blockchain and its smart contracts, self-contained contracts that eliminate the need for third parties. If Ethereum represents the building in which the transaction occurs, the smart contract is the name above the door. There are no smart contracts or defys. For this reason, it is often referred to as the backbone of the industry. Still, there is a second, perhaps equally important, part of the infrastructure puzzle that enables decentralized finance. It’s Oracle.
Oracle: Why Blockchain Needs them
Most decentralized apps, such as lending markets, decentralized insurance products, liquidity aggregators, derivative protocols, and algorithm stablecoins, rely heavily on Oracle, a middleware entity that connects smart contracts to resources outside the native blockchain. I am. Without Oracle, blockchain is like a computer with no internet access. It’s worth it, but it’s almost powerless in terms of being connected and interoperable.
The combination of blockchain (immutable on-chain code) and oracle (safe off-chain data), often referred to as hybrid smart contracts, creates a powerful synergy that sets the stage for advanced blockchain applications. Oracle enables previously closed networks to consume trusted external information and interact with legacy systems. The result is smart contracts that can respond to real-world events and integrate with established business processes.
Oracle is more than just a data feed that connects smart contract networks such as Ethereum to valuable off-chain information. Represents a filtering system that not only quickly fetches external data (usually the latest price feed) and delivers it on the chain, but also verifies the reliability of such information. This is an important role when external inputs trigger high-value automation. transaction.
Ethereum is still the market-leading decentralized blockchain, but it can suffer from severe network congestion and soaring gas prices to handle transactions. As the cost of getting up-to-date price data becomes exorbitant, low-cost alternatives (Binance Smart Chain (BSC), Algorithm, Solana, etc.) begin to look more attractive.
Great Oracle Arms Race
Recognizing the need for innovation in Oracle’s transaction processing is Ruitao Su, co-founder of Acala, Polka Dot’s liquidity hub.
In a recent appearance on the ZK podcast, he explained: “When the Ethereum network is busy, Oracle’s transactions are actually competing with all other transactions. Therefore, what we do with Acala considers Oracle’s transactions to be very important. Since Oracle providers are actually contributing to the network, they need to be prioritized so that they are not responsible for normal gas costs. Instead of charging gas charges, they give incentives and rewards. Must be given.
“That’s why we adopted this customizability and said that Oracle transactions on Acala will be free. Once you are on the list and become an Oracle contributor, you can send price feeds on the blockchain for free.”
Acala operates a network of Oracle node operators, aggregates multiple external price feeds and provides a median reference price. Last month, the platform integrated Chainlink, decentralized’s most widely used decentralized Oracle network (DON), to enhance its parachain launch.
As with blockchain, competition between Oracle providers is fierce. Virtually all networks claim to be the safest, most user-friendly, and easiest to integrate. If Ethereum leads the Defy race, Chainlink is currently in a pole position within Oracle and its network secures the value of over $ 40 billion in smart contracts.
The company’s co-founder, Sergei Nazarov, said: 90% of its value is locked within the dApp. “
Chainlink’s Oracle infrastructure, a chain-agnostic platform with its own Top 20 Native Assets (LINK), is an independent collection of data from a variety of off-chain sources before being validated through what is called Chainlink. Aggregate contract with network of Sybil resistant nodes. LINK tokens, on the other hand, are used to pay node operators for work and are priced according to market demand for the data itself.
First Product-Market Fit: Price Feed
For many, Oracle is synonymous with price feed, the first product market-adapted application, which is commonly used in decentralized transactions, especially those related to loan issuance, derivatives, and stablecoin.
For example, protocols such as Maker rely on price feeds to determine the value of the underlying asset that underpins the asset. Oracle will also provide data on the market price of Maker Vault’s collateral assets, allowing you to know when the platform will trigger liquidation.
In this sense, Oracle can act as an autonomous auditor and monitor fraud in real time. A series of stablecoins (Paxos PAX, TrustToken TUSD, and even BitGo Wrapped Bitcoin (WBTC)) leveraged Oracle to prove the collateralization of tokenized assets and ultimately to Fractional-Reserve Bank. Protect users from and Black Swan events.
As more traditional commodities appear on the blockchain (tokenized stocks, oil, precious metals, etc.), reserve proof may be required for asset issuers.
“Without the external financial market data provided by Oracle, we can’t really build decentralized finance,” explains Sergey Nazarov. “Most decentralized finances are built using a” hybrid smart contract “model that combines on-chain code and off-chain systems. I am using an Oracle network. “
Obviously, other blockchain developers are singing from the same hymn sheet. As soon as Cardano launched smart contracts, Chainlink integration was announced. Meanwhile, John Wu, president of Ava Labs, said that many decentralized projects built on the Avalanche blockchain “remain in integrated mode, waiting for features such as Oracle.”
While smart contract developers rarely stop designing their own oracles or querying free data feeds, there are a lot of things to keep in mind. Abuse of flash loans. The latter scenario allows a malicious person to manipulate the price of a token through a flash loan to buy the token at a significantly reduced rate. Such attacks are much more difficult to carry out if the oracle is decentralized.
Of course, price reference data is not the only type of off-chain information that Oracle can provide.
Evolution of oracle
At the stage of formation, the majority of dApps were financial, but as projects began to pay more and more attention to Oracle networks for event-based results of all kinds, it is beginning to change. For example, the Oracle network can power parametric insurance …