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How Blockchain Oracles Power the World of DeFi


coinquora.com 16 September 2021 11:49, UTC
Reading time: ~4 m

Back in the day when technology was scarce, banks were a viable solution in finance. In 2000 BC in Assyria, India, and Sumeria, the earliest banks were merchants who gave loans in the form of grains to farmers and traders. A few millennia later, banks evolved from a hero figure that gave opportunities for people to thrive, into a villain that caused the global financial crisis of 2007 – 2008, which has been the most serious crisis in finance since the Great Depression.

The crisis led people to examine what the problem was, and many came to the conclusion that it was centralization. Though it brings benefits, it also poses many risks like data breaches, or worse — an economic collapse. For this reason, Bitcoin was created. Many believe that the easter egg “Chancellor on brink of second bailout for banks” that was written on Bitcoin’s genesis block was a call to move from centralization to the use of blockchain and cryptocurrency.

Bitcoin introduced us to decentralization. However, despite being decentralized in nature, blockchain and crypto somehow managed to adopt centralized mechanics. But maybe those days are over. Fast forward a decade, brilliant minds developed solutions that shift the gears further down the decentralized road. Smart contracts and blockchain led to the development of DeFi — Decentralized Finance.

Decentralization provides an environment that is not controlled by any single authority but a collective group of entities. This inherently applies a higher level of security and shifts the complete control of data from a centralized authority back to a number of trusted entities. Aside from this, one of the more important capabilities of decentralized finance is empowering people and businesses.

Let’s take smart contract blockchain frameworks like Ethereum and XinFin Network as an example. Both provide platforms that enable various solutions like minting tokens and creating decentralized applications which led to benefits such as automated market-making in decentralized exchanges (DEXs).

Blockchains are very deterministic in nature. But for DeFi to work properly, blockchains need to connect with off-chain data such as live currency exchange rates for real time settlement, weather data for insurance with farmers, inflation data, and more. One solution may be connecting through APIs. However, using APIs bring risks of hacking or depreciation to the point where nodes would have different data and would have a lot of trouble determining the actual state of the blockchain.

The API problem led to a very interesting solution — blockchain oracles. A blockchain oracle is described as a device or platform that connects a deterministic blockchain and outside data. Oracles bring data inputs using an external transaction. With this, the blockchain itself will contain all of the data necessary to verify itself. This is the reason why oracles are also dubbed as blockchain middleware.

Oracles aren’t free from issues. While it’s a good solution, programmers encountered what they call the “oracle problem”. This is defined as a point of failure when using centralized oracles. If an oracle is centralized, the benefits of smart contracts are somehow nullified. This means that an individual entity has power over the smart contract — this is a major security risk.

Because of the risks of centralized blockchain oracles, the advent of decentralized oracle networks was inevitable. Projects like Plugin began to provide services that solve the oracle problem. Unlike a centralized oracle, decentralized oracles use groups of independent blockchain oracles to fetch and provide off-chain data to blockchains. Oracles in a decentralized setting takes data independently from sources outside the blockchain and brings it over to the blockchain. The system aggregates the data to come into a deterministic data point.

For instance, if you’re running DeFi on the XinFin Network, you can opt to use a platform like GoPlugin.co that provides decentralized blockchain oracles. This framework allows your blockchain to connect with real-world data with a reliable decentralized infrastructure. This means that if nodes or data sources face hacking, depreciation, or deletion issues, the platform will utilize its decentralized network to keep your project on track.

There are many ways to leverage technologies like Plugin. By utilizing a network of nodes that will be the source of data, smart contracts will be free from point of failures. Aside from this, the project is blockchain agnostic — in simple terms, it means that it’s compatible on any blockchain whether it’s a DLT or a non-DLT platform. The project consistently works to integrate with more blockchains so that all blockchains will be able to access off-chain data that’s secure and reliable.

Utilizing centralized oracles pose risks, but you can easily mitigate this by opting for decentralized blockchain oracles such as Plugin. Moreover, developers — from beginners to experienced engineers — can benefit from comprehensive documentation that can assist in development.

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