Why do we need decentralized oracles?

The oracle is an important part of the encrypted economy infrastructure. Blockchain has no oracles, just like computers are not connected to the Internet. A blockchain without an oracle cannot establish contact with the outside world, and can only refer to the local information of the internal ledger of the blockchain.

This limits the use cases in the encryption industry, and oracles can solve this problem.

How do DeFi protocols such as Maker, Aave or Compound get real-time price feeds of ETH/USD and calculate the clearing threshold? At this time, an oracle is needed.

How to trade synthetic assets such as AMZN, AAPL or TSLA? The oracle can solve the trading problem.

The oracle requires a high degree of security, because a lot of data depends on the oracle to provide. If data transmission is leaked, people will suffer losses. This situation has happened several times.

Since so many DeFi protocols rely on oracles, users in the crypto circle should have a deep understanding of them. Today, ChainlinkGod reveals the value of decentralized oracles.

The following will introduce the decentralized oracle in detail.

Decentralized Oracle Network ( DON s): Empowering the Smart Contract Economy

Smart contracts are decentralized applications that can be automatically executed in the blockchain network, and have code logic, that is, if an x ​​event occurs, the y action is executed.

The maintainer of the public chain is not a single central agency or technology monopoly companies like Facebook, Google, or Apple, but a network of independent computers around the world. Under economic incentives, these computers can reach a global consensus on the current state of the blockchain even without any central leadership to coordinate. This mechanism gives the public chain many valuable features, such as censorship resistance, permissionless access, non-custodial asset management, and irreversible transactions.

But there is a fundamental problem that has not been solved, that is, the blockchain itself is like a computer without a network, unable to obtain external data.


Blockchain only tracks the activities that occur in its own ledger, so it has strong security features. In this case, the blockchain is actually an isolated network, and it cannot obtain the data of the external world by itself, while maintaining all the practical characteristics, and the smart contract needs these data.

This is a thorny issue because most smart contract use cases require external data, such as obtaining ETH/USD prices, the average temperature in Buenos Aires, the location of shipping containers with raw materials, and another blockchain network (Such as BTC), or any other data that has not been stored in the local ledger of the blockchain.T0kmB1p7ZvVQkNAKkLhNRSGL8LWOOHISSEjYYYZW.png

In order to solve the problem of not being able to obtain external data, the blockchain needs an additional infrastructure called an “oracle”, which obtains data from off-chain data sources and transmits it to the blockchain for smart contract applications to use these information. The oracle not only provides a data transmission mechanism on the chain, but also provides a verification mechanism to ensure high data integrity. If the smart contract is to maintain end-to-end data certainty, the oracle mechanism needs to be as safe and reliable as the underlying blockchain, because data input directly determines the output of the smart contract.

As we all know, asking the channel to be so clear is a source of fresh water.

Therefore, the oracle mechanism cannot be a single centralized node, because this will cause a single point of failure, such as node damage or offline, destroying the blockchain network composed of thousands of nodes. In addition, a single data source may deliver wrong data or have offline problems, and the mechanism should not rely on a single data source.ZNuMx1juL3UHiVbl7LRXQKWAY6uAjpOWck3gR1SI.png

In summary, in terms of node operation and data sources, the oracle mechanism must be decentralized to ensure that there are no points of failure. Although the goals of the blockchain and the oracle are different, the former provides transaction consensus and the latter provides real-world data consensus, but the complementarity of the two means that similar methods must be adopted to achieve security.

A decentralized oracle network DON with good security must also provide additional security levels, such as the ability to connect to high-quality data sources to ensure data accuracy and availability. If the oracle node is run by the data provider, it will pass Encrypted signatures, generate data integrity proofs, use multi-layer aggregation processes to reduce downtime, abnormal values ​​and corrupted data, perform data verification, based on implicit incentives and pledges and other encrypted economic rewards, to keep nodes in normal operation and provide selective provision Data privacy, such as zero-knowledge proof.8uiINfQRFF5PyQk2fBdADtQ0SoggiMuOrfsYzONv.png

Chainlink is the most widely used oracle solution. Following this set of defense systems, it provides a common framework for the smart contract ecosystem and establishes a decentralized oracle network that can obtain any external data resources.

Currently, there are more than 450 Chainlink price feed services operating on multiple blockchain networks, including Ethereum, Polygon, BSC, Avalanche, xDai and Heco, and plans to expand support for more blockchain and Layer 2 solutions. Such as Arbitrum, Optimism, Solana, etc. The oracle network can not only provide data in a decentralized manner, but also implement a series of secure off-chain computing services, including Verifiable Randomness, Keepers, and other various off-chain computing services under development, such as FSS, DECO, and Town Crier.o8NZ8PHYIXSPe9vJmQCWo6eK8CHhzHKjh3qAvXkd.png

With a high-security decentralized oracle network, developers can create hybrid smart contracts that combine blockchain smart contracts and decentralized oracle network services to provide more advanced functions than a single chain logic. These applications make full use of on-chain and off-chain advantages to support use cases that have long been regarded as the core value of smart contracts.

Decentralized oracle network use cases

Although the decentralized oracle network can almost support an unlimited number of use cases for hybrid smart contracts, the following will introduce some use cases that have significant disruptive power in the short, medium and long term, including DeFi application cases that you may be familiar with. As the encryption ecosystem continues to innovate and progress, these use cases will slowly evolve to meet user needs.

1) Decentralized finance and price feed

Today, for hybrid smart contracts driven by a decentralized oracle network, the first and most important use case is decentralized finance, also known as DeFi. It can be said that as a product market for blockchain technology, DeFi provides a decentralized, permissionless, non-custodial, and censorship-resistant solution that replaces today’s fragmented traditional financial system. However, what people don’t understand is that it is the decentralized oracle network that can realize the DeFi ecosystem.

For example, the DeFi application that currently ranks first in lock-up value is the decentralized currency market Aave, which allows users to borrow dozens of different on-chain tokens.

Aave has created a two-sided market where borrowers can earn passive income through idle tokens, and borrowers can obtain liquidity, which can be allocated according to their wishes. Decentralized money market agreements such as Aave, Compound, Cream, and Rari have successively used Chainlink’s price feed service to calculate the maximum loan size during the establishment of a position, as well as determine the level of position collateralization and liquidation thresholds to maintain overall market borrowing balance.VNlUNEwY0MCXQy8oZgwNQfrfiNHctR94iN51qSQs.png

At present, the DeFi currency market is mainly for native cryptocurrency and stable currency lending, but in the future, new markets can also be created to realize the tokenization of real assets. For example, in this market, users can tokenize real estate, borrow real estate as collateral, replace mortgage loans, or borrow CBDC to fund businesses. As a general infrastructure, this market can theoretically support any type of tokenized assets. Based on the ERC20 and ERC721 token standards, these assets can also be backward compatible.

Another financial primitive realized by Chainlink is Synthetix and other synthetic asset agreements. These agreements allow users to use on-chain tokens to generate synthetic assets by over-collateralization. Synthetic assets can track the price of cryptocurrencies such as BTC, ETH, and LINK. Anchor real-world asset prices, such as legal currencies such as the U.S. dollar, euro, and yen, commodities such as gold, silver, and oil, indexes such as FTSE, N225, and sDEFI, and stocks such as TSLA, GOOG, and AMZN. Based on the global debt pool, users can simply switch data sources to determine the value of tokens and realize the exchange of synthetic assets with zero slippage.7976NhyTp9j7QhsLa32iZ3QejPws5ElZ2d0h4nwR.png

With the combination of on-chain mortgages and data provided by Chainlink, any real asset or indicator can be added to the encrypted economy through synthetic assets, including real estate valuation, CPI indicators, total value of raw materials, and total value of locked positions of specific agreements. , Vitalik’s Twitter followers or other quantifiable and digitized indicators can be used as data sources on the chain.

Synthetic assets have unlimited potential. In this way, users can tokenize anything, invest and hedge, without leaving the on-chain ecosystem.

There are other use cases for decentralized oracles in the DeFi ecosystem, such as decentralized/algorithmic stablecoins, revenue aggregators, decentralized exchanges, perpetual contracts, options, futures, flexible supply tokens, market forecasts , Yield farming, asset management, token cross-chain, fixed income, etc.

2) Dynamic NFT and verifiable randomness

In 2021, NFT public attention has risen sharply, and the transaction volume and diversity of tokens have increased exponentially. Although many NFTs are static images or gifs, dynamic NFTs supported by NFT platforms such as Ether Cards are also emerging. These platforms use external data input to turn the experience of acquiring and owning NFTs into games.

These external input data may include data from the real world, which will cause the characteristics of the NFT to change in real time. Dynamic NFTs include sports NFTs, whose value is linked to player performance data. In the NFT market, artists can change digital artwork such as NFTs over time, such as changing the background image of the NFT according to the weather and time of New York City. Nowadays, more and more people choose to use verifiable randomness solutions, such as Chainlink’s Verifiable Random Function (VRF), to obtain external data and enhance the NFT and on-chain gaming application experience.

With verifiable randomness, developers can add verifiable random features, assignments, and casting activities to enhance NFT. Aavegotchi is an NFT platform that uses Polygon sidechains to verify the randomness.

When going online, the Aavegotchi smart contract will initiate thousands of on-chain randomness requests to determine the Aavegotchi NFT received by the user after opening the portal. The NFT supply is 10,000. Through random games, users can participate in the “rarity farming meta game”, try to mint rare NFTs or upgrade existing NFTs by winning a lottery or other games.DGLruImx3pHxIn249XF8Xm4Bgb6rfvQa5cIz89lr.png

Another example is the increasingly popular NFT chain game application Axie Infinity, which uses verifiable randomness to determine the characteristics of the newly minted Origin Axie. Under this mechanism, Axie can have a chance to own mysterious body parts, and Axie with mysterious parts in the past can sell more than 300 ETH.

By creating dynamic NFTs, users can get a new experience different from Web 2.0.

3) On- chain audit records and proof of reserves

The smart contract ecosystem continues to develop, and the number of stablecoins, encapsulated cross-chain assets, and tokenized real assets is also growing. However, the collateral supporting these tokens is off-chain, which means that the smart contract cannot obtain native data, and the tokens cannot be audited to ensure the normal mortgage rate.

This situation has led to new risks such as low transparency, insufficient mortgages and partial reserve borrowing. The decentralized oracle network provides necessary on-chain data through proof of PoR reserves, verifies the off-chain mortgage of a certain token, and eliminates risks.

If tokens secured by off-chain assets can be audited on-chain at any time, users can obtain greater transparency. When a certain insufficient mortgage asset is detected, smart contracts can execute application-specific logic to prevent potential risks in a short period of time. Part of the reserve fund lending activities. For example, DeFi applications may temporarily suspend service or prevent more tokens from being minted from certain insufficient collateral assets. The proof of PoR reserve not only helps prevent systemic risks like the 2008 financial crisis, but also creates a more trustworthy DeFi ecosystem for everyone.

Stablecoins usually use U.S. dollars held in off-chain bank accounts as collateral. For such tokens, there are now Paxo’s PAX stablecoins and TrustToken’s TUSD stablecoins for proof of PoR reserves. The latter reserve data is provided by Armanino, the top 25 auditing company in the United States. The company will update the data in real time to prove the holdings of the US dollar bank chain assets of the TUSD stable currency TrustToken. Given that TUSD exists in multiple blockchains, TrustToken has released proof of PoR reserves and proof of supply data on Ethereum, so that users can cross-reference data through smart contract applications before using stablecoins to participate in economic activities.7seDnnX94X7O5SHf4TAfen9f323DpDn8ryl7QQzZ.png

In addition to the US dollar-backed stablecoins, more and more users hope to implement token cross-chain operations, such as transferring BTC to Ethereum and using tokens in the DeFi ecosystem. In this case, both Ren Protocol’s renBTC and BitGo’s WBTC tokens have issued proof of PoR reserves to audit the real BTC asset holdings of the BTC blockchain supporting cross-chain tokens. Similarly, before the token cross-chain operation, smart contracts can use these data proofs to protect users from the risks of unsecured tokens, such as toxic loans or unfair transactions.6kAVXuu8vp8jsF8zoo4Yb5YbQns4jfqxNtCZdY0W.png

The concept of PoR supported by the decentralized oracle network goes far beyond the above use cases. In addition to these use cases, people can also audit real-world asset-backed tokens, such as tokenized real estate. The audit process includes providing information and verification about asset ownership and cash flow, adding the information to the blockchain, and allowing users and smart contracts to analyze the authenticity of the assets secured by these tokens. As the DeFi economy swallows the traditional economy, the need for on-chain transparency will continue to increase.

4) Calculation of the chain eeper

Regarding the nature of smart contracts, people often mistakenly believe that such contracts have autonomy, but in fact, by default, smart contracts are in a “sleep” state and must be “wake up” to perform any state changes . This requires the private key holder to sign and initiate an on-chain transaction, using an external account EOA. For use cases where users interact on the chain, this is acceptable, but there are many smart contract functions that need to be triggered at standardized time points or events.

Although the decentralized oracle network is known for providing data services, it can also perform off-chain calculations that require only a minimum degree of trust. This includes providing decentralized transaction automation services in the form of “Keeper”, which monitors the on-chain status of smart contracts and/or real-world events, and automatically triggers on-chain functions as needed. One of the implementations is Chainlink Keepers. Chainlink Keeper uses the same set of reliable oracle nodes, which have proven their reliability by providing decentralized data sources.

A representative use case of Keeper is for decentralized currency markets, such as Aave, to automatically liquidate insufficient loans. In the market, Keeper monitors the position on the platform and triggers the liquidation function for any loan below the liquidation threshold of a specific pool. The Aave smart contract will verify the on-chain liquidation by cross-referencing the price data source on the chain, and then start the liquidation process. Therefore, the currency market provides users with more guarantees about the solvency of the platform through highly reliable liquidation robots.mtMH9vLnzhoCHgelE7U2pa1jzPbekiQqvQcm9Duz.png

Keeper provides a general transaction automation service. Any smart contract function can be automated, including executing limit orders, harvesting revenue, issuing pledge rewards, providing flexible supply algorithm stablecoins, linearly releasing tokens, recharging token balances, and management Debt positions, changing yield strategies, etc.


The decentralized oracle network expands the capabilities of blockchain networks and smart contract applications, realizing its true potential, and providing advanced digital protocols that accurately execute expectations for a wide range of use cases.

Although DeFi is the most prominent representative use case today, it is more likely that in the future, developers can obtain external world data directly on the chain through a decentralized oracle network, and generate the next mainstream use case for smart contracts.

The number of potential use cases is unimaginable, and the future has never been so bright.

The content of this article comes from Bankless


Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/why-do-we-need-decentralized-oracles/
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