Tokyo FinTech
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Tokyo FinTech

Unblock Tokyo — Band Protocol — Decentralized Oracles

The “Unblock Tokyo” conference was held on Saturday, October 5 at BinaryStar in Ginza, Tokyo. Soravis Srinawakoon, Co-Founder and Chief Executive Officer at Band Protocol, presented on “Use Cases of Decentralized Oracles for Mass Smart Contract Adoption”. Here is what he had to say.

Let me start with a quick introduction of myself. My name is Soravis, I am the CEO and Co-Founder of Band Protocol. We are working on a decentralized Oracle. That means we provide and connect real world information with the blockchain and smart contracts. I will cover two main topics. First, how the design of this Oracle can be achieved in the most reliable and the most decentralized way possible. Second, what are other type of applications that can be built on top of this Oracle.

A few words about myself, I got into this space around 2014. I actually have a technical background, I studied computer science at Stanford, where I got my bachelor’s degree. We first started off with small games that rewarded players in cryptocurrencies. There were about 500,000 users, and we sold our business before we started Band Protocol.

Let us first talk about this Oracle. Clearly, blockchain needs this trusted source of data. Right now, a lot of people talk about the potential applications of smart contracts. The problem is, the smart contract is actually not that smart. A smart contract is actually just a piece of code on Ethereum as a Layer One solution. Because it is just a piece of code, it does not understand and it is not aware of real world information, e.g. financial data like the price of Ethereum in USD.

Right now, there are two solutions to this problem. One is obviously a centralized approach. For example, Oraclize is essentially a service that provides data. Tell me what you want, and I will give you the answer. Since it is a centralized solution, it is sort of defeating the whole purpose of using smart contracts. Since you control the direct input, you can essentially control the output as well.

The second solution is more demanding. Chainlink, for example, has been around for two years, with a successful on-demand oracle that goes out and fetches the data from trusted sources. This solution is really flexible, however, the drawback is that it is complex and synchronous — that means you need to wait a few blockchain iterations before you receive the feedback. People are working on resolving this, including the concept and protocol.

Why is this important? Take MakerDAO, for example. They provide decentralized lending that allows people to receive DAI by collateralizing Ethereum. With the current implementation, they need the price of Ethereum in order to issue DAI. And if this price of Ethereum is incorrect, if somebody cheated, it actually has the potential to collapse the whole system. Another implementation is Augur, a prediction market. This one is much more on-demand, much more synchronous. You need someone to solve the data, like who won the Democratic primary election. These are some of the real-world information types that somebody needs to bring to Augur.

So where do we fit into the Web3 stack, where we believe things will be much more decentralized than we have today with Web2? Web3 applications do not have their own data, they need to rely on different data sources. So how do you build a decentralized Uber if you do not have the location, because you cannot access the Google Maps API? So a number of projects are working on solutions for this, like Augur, Chainlink and us, Band Protocol.

Let us quickly talk about the design and how we can make it the most decentralized possible. Because, again, if it is not decentralized, then you might as well not use a smart contract in the first place. So, at Band Protocol, we provide a standard framework for the app to collect data from off-chain. We do not want one person reporting the data, because if it is only one person reporting, then essentially we just came back to centralization. So what we do in our system, we have a number of data providers, who need to stake tokens as a collateral at the protocol level. So they have some skin in the game, just like miners. On the other hand, we have a lot of apps that consume this data, and the way Band Protocol works, we are not truly on-demand, we basically identify a lot of common use cases, e.g. a lot of the decentralized finance use cases rely on the price of Ethereum.

For these common use cases, we have data providers push the data on-chain, so the data such as the price of Ethereum is actually written on the blockchain itself. This allows all the apps to consume the data instantly. Just like when they look up data using SQL, the apps can process the data within one transaction, there is no delay. And it is scalable — whether you have one app or hundreds of thousands of apps consuming the same data, there is no extra cost in the data provision. The data consumers, the decentralized finance applications, are paying a fee to access the data.

For token holders, we have a system similar to delegated proof of stake (dPoS) where token holders can stake on behalf of data providers. And they have the incentive to curate the best data provider possible. Because if they do that, there will be more trust in the system, there will be more usage from the apps, and then that will lead to more revenue being generated. That revenue gets split between data providers and their stakers. Fundamentally, we provide a truly decentralized oracle, and we need the right incentive structures such that token holders and data providers are incentivized to provide the right data feed and and keep providing that data to users.

Let us take a closer look at the application side. We are almost like a Layer Two solution, where we sit on top of the computation. Right now, we are live on Ethereum. So a lot of the projects that are being built on Ethereum can access all our data. We are talking a lot about these decentralized applications, but what we observe in the market is that we are not even touching the tip of the iceberg. We are talking about over-collateralized loans, which are not even big in traditional finance. Why would I put in USD 200 of an asset to take out USD 100 worth of money? In the future, we will see a lot more decentralized applications that are more like real world application today, e.g. stock trading, derivatives, money market funds, commodities, etc. At Band Protocol, we have a number of data brokers that come from different geographies, different industries, such as crypto exchanges, financial institutions, and stock exchanges themselves, who keep pushing the data in. Once we have this data that you can obtain in the most reliable way possible, then the developers can concentrate on building apps and smart contracts that provide a real benefit to users.

Derivatives trading is a good example. If you want to take small long and short positions on the blockchain right now, it is really difficult, almost impossible to do in a more decentralized way. Also, take a look at real world events like bank transfers — if we are able to execute on a bank API, then this allows for many potential smart contract applications. For example, in Trade Finance, when we receive an invoice that triggers an API call on my smart contract, then that smart contract can automatically wire money, and all this can happen in only one transaction.

I am really excited. We just went live two weeks ago, actually, on Ethereum, but we are not particularly constrained by Ethereum, we are looking to expand our solution other blockchains. All the Layer One solutions need data. Whether you have the fastest or most scalable blockchain solution, if you do not have the data, it is going to be really impossible, or very difficult for a lot of developers to build any of the app economy. So hopefully, this provided a good overview of Band Protocol, and hopefully, with the right design of the oracle a lot dApps can be built on the blockchain.

Thank you.

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Norbert Gehrke

Passionate about strategy & innovation across Asia. At home in Japan. Connector of people & ideas.