DeFi & Blockchain Oracles: The Revolution Standing Behind the Buzzwords
Decentralized finance, or DeFi, has become a breakthrough in the tech world, which is not so easy to impress. Another major crypto achievement, although not so widely discussed, is blockchain oracle. It’s the service enabling smart contracts — self-executing preprogrammed contracts coming into force when certain conditions are met — to access data stored off-chain. This could be anything, ranging from an asset’s value to the result of a sports match.
Smart contracts have taken blockchain development to the next level by automating transactions and allowing for all kinds of operations. However, their use case is very limited without a reliable source of data not stored on the blockchain. That’s been a lingering challenge for crypto-enthusiasts, and its resolution determines the future of the technology.
We have taken a look into the history of blockchain oracle services and tried to figure out why the platforms integrating them grow tremendously in capitalization. Besides, we explore the reason behind the spike in prices of the tokens circulating on oracle’s platforms.
The time of glory for oracle
Cryptos native to oracle-based apps have reached the total market cap of almost $6 billion, growing in price 600% in a year. Chainlink’s LINK token is leading the market with the 5th spot by market capitalization. Other oracle tokens are experiencing a rapid price rise as well and are now some of the most demanded digital assets.
The competitors of the oracle protocol are getting similar attention, with TRB increasing in value by almost 2.5 times. It seems like everybody is trying to solve the oracle issue, as such projects are receiving ever more investment.
What’s the oracle issue?
Smart contracts constitute an essential part of the decentralized economy, as programmable assets boost efficiency and mitigate risks involved in P2P operations. They have replaced an intermediary between the two parties ready to make a swap, automating the process to the utmost.
The technology is a real go-to; however, its success greatly depends on the reliability of data fed into the contracts. The problem was first addressed in 2015, as Ethereum was launched. Its co-founder, Vitalik Buterin, highlighted the importance of finding a secure way to deliver off-chain info to blockchain apps. Data sources must be reliable and constant, as their disfunction may harm dApps using them.
One of the early attempts to solve the issue was taken by SmartContract.com that proposed to use centralized data sources. Nevertheless, in 2017 the business started to develop a decentralized Ethereum-based oracle service meant as a connection between blockchains and the outer world. It was named Chainlink and went active in 2019, inspiring the emergence of many other oracle projects.
The future of smart contracts compromised
Most of the smart-contract-based applications rely on the off-chain data, as their service directly depends on it. For instance, price-prediction apps have no sense if the info on asset value doesn’t match reality.
Ethereum-based dApps attracted a wave of investment in 2017, with Ether’s price going from $9.70 to $1,470 per unit in just a year. Any project claiming to have something to do with the buzzword technology raised decent funds in ICOs, although many of them failed shortly.
As Ethereum was unable to resolve the oracle problem, the price of ETH fell 94% throughout the next 11 months since its high in January 2017. It became clear that a trustworthy source of data was crucial for further crypto development, and a number of subsequent projects were targeting it.
Decentralized oracles, like Chainlink, became the way out, serving as intermediate data providers. For example, LINK can be utilized to pay outer data services; besides, it ensures data quality by being collateral for those who provide the info. Any project involved with Chainlink’s oracles is required to access their native tokens.
Risks involved with DeFi & oracle
The number of DeFi followers is booming, attracted by well-designed lending and borrowing strategies. This results in the growth of funds locked within DeFi protocols, which is great for oracles, as decentralized finance is their first use. However, the industry has its own weaknesses.
Hackers are constantly targeting smart contracts with millions of dollars locked in them. Any code vulnerability can compromise the system, and this has happened many times so far. Experts advise not to fall for any DeFi novelty but to take time figuring out what stands behind each project.
One more issue concerning DeFi is that, as with any finances involved, this sector is monitored by regulators. The latter strive to protect investors from scams, and if the market gets over-regulated, as happened with ICOs, the interest in it could significantly drop.
Ethereum scaling to influence oracles
The issues regarding transaction capacity and gas prices — the fees paid for transactions within Ethereum — still limit its scaling. Chainlink’s users allegedly spent about $1 million on transaction fees in August and the greater interest in the network will boost gas demand and result in even higher fees.
Ethereum developers have long been working on a solution which is planned for launch in 2020. Ethereum 2.0, an update to the network featuring sharding, the technology expected to largely increase transaction throughput, will not land during Phase 0.
Another significant effort to scale up Ethereum is the introduction of Layer 2, technologies meant to move transaction info off the blockchain. This would allow processing ~1000 transactions per second instead of the current 15 ones, with no need to increase fees. The solution is anticipated to launch even before Eth2, and it’s also a good thing for oracles.
Oracles have become an inherent element of the whole DeFi ecosystem, as they provide a secure link between smart contracts and off-chain sources feeding them data. Tokens native to decentralized oracles serve as collateral to ensure the provision of quality data that makes dApps truly useful.
The much-awaited scaling of Ethereum is crucial for the future of oracles and the overall sector of decentralized finances. The update is sure to mark the beginning of the new era in blockchain development, bringing us the opportunities we never dared to imagine.