There is no DeFi without trustworthy data and oracles are its gatekeepers.
Decentralization is a foundational principle of the blockchain-supported economy. Every industry name is getting a capital “D” in front of it, DeFi being the prime example.
However, while the user-facing side of the application may appear decentralized, the backend may be hiding an “inconvenient truth”. Key data that triggers smart contract events could be coming from a centralized source, reducing “decentralization” to a marketing moniker.
Trust in a decentralized world
Oracles help dapps communicate with the outside world. Dapps utilize smart contracts, which are essentially sets of directions that are executed upon different triggers. Data incoming from the outside world, such as asset prices, for example, can act as that trigger.
Consider the budding DeFi sector and how much it depends on accurate timely prices. If those inputs are wrong or late it can compromise the entire system. If the oracles providing the data are centralized it creates a single point of failure and vulnerability to manipulation, something the decentralized economy strives to avoid.
The industry has already heard several alarm bells in regard to oracles in 2020. The bZx incident, worth around $330,000, was initially thought to be an issue of an oracle being manipulated, and although the issue looks to not have been an oracle one, the presented scenario exposed a potential vulnerability.
The near-collapse of MakerDAO in March forced even more people in the industry to take notice. While again, there was not an issue with the functionality of the oracle, the latency problem exposed a serious vulnerability.
Who do you trust
At the moment Oraclize and Chaninlink appear to be the leaders in oracle services for the decentralized ecosystem. Oraclize offers a centralized solution that utilizes Authenticity Proofs to ensure data integrity.
Chainlink uses a network of nodes and economic (token) incentives and reputational filters to provide data inputs for applications. Chainlink has been gaining popularity and adoption for much of the past year, which has seen it become a top 15 project by market capitalization on CoinMarketCap.
The decentralized nature of Chainlink is an attractive feature, but Oraclize is still widely used in the Ethereum ecosystem. Moreover, while Chainlink may be getting all of the media attention, other projects have been quietly gaining momentum. The oracle race may soon resemble the scalability one between layer one protocols in 2017-2018.
A wealth of players
There is no shortage of projects looking to get in on the action. Naturally, big brand players like Microsoft and Coinbase have shown interest. Microsoft announced its Confidential Consortium Blockchain Framework back in 2017 but has been relatively quiet since. Coinbase on the other hand is a recent entrant looking to capitalize on its brand recognition in the space.
Still, these players are seen as centralized actors and are thus treated with caution and even concern. Various other alternatives are also available. Given the substantial number of decentralized cloud projects, it is no surprise that some are starting to look towards oracle services, iExec being one example. Given the potential synergies, it would be natural to expect more oracle providers to emerge from this sector.
Others, like Witnet, are utilizing standalone blockchains to build out an oracle network. Witnet in particular is focusing on reputation as a key element for identifying trustworthy nodes.
Another noteworthy oracle project, Band Protocol very recently launched on Cosmos. While the project’s market cap is small compared to that of Chainlink, the move may be a piece of a larger trend.
With the Tendermint ecosystem emerging as a competitor to Ethereum, it is important to watch how the DeFi infrastructure pieces align. Band Protocol first launched on Ethereum, and now will have a presence on Cosmos. With its services reportedly being used by Binance, the Binance DeFi infrastructure is quietly becoming more and more comprehensive.
It is conceivable that the oracle race may develop along with the eventual Ethereum-Binance DeFi competition.
When dapps become oracles
We already see that DEXs are becoming oracles, given their ability to provide price feeds. However, other dapps like Augur, given continued growth could see more utilization as oracles as well.
What is also important, is that the industry is seeing the emergence of technology to help external sources communicate with the oracles. For example, Deco is a “privacy-preserving oracle protocol” that may open the path for different kinds of data to enter the decentralized ecosystem.
It is important to understand that even with decentralization without proper privacy measures, data may be exposed if not to centralized agents then to individual node operators. Chainlink is already addressing this issue, and it is reasonable to expect other oracle providers to do so as well.
Future full of oracles
The decentralized ecosystem lives off of data, and as such, oracles will start attracting more and more attention as a vital part of the infrastructure. It is even possible to imagine a future where projects utilize multiple different oracles for redundancy purposes.
2020 has so far been the year of DeFi, but it is important to remember that there is no DeFi without trustworthy data and oracles are its gatekeepers.
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