The Vital Role of Decentralized Oracles in Blockchain & DeFi
Blockchains are purposefully isolated from external systems to acquire their most valuable properties, such as solid consensus regarding the validity of transactions, the prevention of double-spending attacks, and the mitigation of network downtime. The secure interoperation of off-chain systems with a blockchain requires the addition of oracles to bridge the two environments. Oracles are computerized systems that operate like application programming interfaces (APIs) and offer a way of securely integrating off-chain data into a blockchain network’s on-chain environment.
Smart contracts can also be implemented on blockchains. They are programs running within a blockchain that automatically execute a set of predetermined steps in a traceable and irreversible manner when certain conditions are met. Contrary to traditional contracts, smart contracts are executed without a third party and can be tailored to fulfill almost any requirement. Most smart contract use cases, such as DeFi, rely on real-world data and events happening off-chain. Smart contracts based on blockchain technology use oracles to obtain external data, as they serve as a means of communication between the outside world and the blockchain world. Therefore, oracles allow blockchains to support a wide variety of digital agreements by offering a universal access point to resources located off-chain while maintaining the valuable security properties of blockchains. In such processes, a blockchain oracle is not the data source but the layer that queries, verifies, and authenticates external data sources and then relays that information.
The two-way communication between oracles and blockchains allows data to be sent in or out. Oracles can bring blockchain data into the outside world, though they are more commonly used to bring real-world data into a blockchain network. Almost anything can be imported into the system, such as asset price fluctuations, transaction reverse and savepoints, or proof of successful payment.
A frequently programmable inbound oracle example is: “If an asset reaches a certain price, then place a buy order.” As an alternative, suppose you and a friend deposit ETH into a smart contract and place a bet on the price of Bitcoin over the coming month. You lock ETH into the smart contract, and at the end of the month, an oracle provides accurate, immutable price data, and the funds are automatically released to the winner. In contrast, outbound oracles notify the outside world of an on-chain event. For instance, a smart contract might be programmed to unlock a smart lock on a rental unit connected to the internet if a cryptocurrency payment is received at a specific crypto wallet address.
The classification of oracles depends on the source of information, the direction of the information, and the degree of trust. Data can come from either hardware or software. Hardware oracles convert physical data into digital values that can be fed into smart contracts directly from the physical world, such as barcode scanners and data collection sensors. Software oracles retrieve information from online sources, such as cryptocurrency exchange statistics.
Smart contracts and oracles offer significant benefits to many industries, such as asset prices in finance, weather information in insurance, randomness in gaming, IoT sensors in the supply chain, ID verification in government, and more. Blockchain-based platforms like Pledged Capital make good use of this technology and derive immeasurable benefits for the crowdfunding sector, giving transparency and security to the market while also safeguarding both producers and investors.
Furthermore, oracles serve as trusted intermediaries in the DeFi ecosystem. DeFi applications are financial tools based on blockchain technology — in most cases, the Ethereum network. DeFi products and applications primarily use decentralized oracles because centralized oracles contradict the company’s ethos. It is also worth noting that we are currently building behavior-oriented Oracles that track and score users by their stake decisions, load up, accumulation, and the usage of allocations given. In simpler terms, our Oracle will provide investors scores in order to have a fair and realistic allocation rather than providing investment opportunities to profit-oriented and buy-and-dump profiles.
Through safeguard mechanisms, decentralized oracles could eliminate many systemic risks from the blockchain ecosystem. The use of smart contracts without oracles would be minimal, as they would only be able to access data from their own networks. Additionally, the outcome of smart contracts directly depends on the data provided by oracles to blockchains, which is why it is critically important that the oracle mechanism be accurate for the contract to execute correctly.
As a team of passionate professionals dedicated to developing a safe blockchain-based Web3 platform for investors, Pledged Capital understands the significance of savvy projects focused on accuracy and transparency in the ecosystem, which is why they have chosen oracles to provide reliable data feeds. Soon, the oracles will serve as the fuel that powers the next generation of powerful apps and smart contracts. Pledged Capital now works with Supra Oracles to access next-generation cross-chain solutions for leading blockchain and smart contract applications. Their oracles work with many cryptocurrencies on Ethereum, Solana, Polygon, Cardano, Hashgraph, Tezos, Avalanche, and Binance Smart Chain.
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