If you have an interest in blockchain technology, you may have come across people using the term “DeFi Oracles” without having much of an idea of what they’re talking about. In this article, we offer a detailed explanation of what crypto oracles are, what they’re used for, and what risks are associated with them.
So, if you’d like to learn more about DeFi oracles, keep reading to get the full picture.
What is a Crypto Oracle?
A crypto oracle is a type of third-party service that allows smart contracts stored on a blockchain network to access real-time data stored outside of the blockchain. In other words, these oracles serve as intermediaries between the blockchain and the real world.
These services do not store data themselves. Rather, they act as conduits for data to pass along. Crypto oracles authenticate this external data before transferring it to the closed blockchain network.
Different types of blockchain oracles
There are numerous types of blockchain oracles. Crypto oracles, first of all, can be divided into one of two categories:
Hardware oracles: these types of oracles collate data straight from the real, physical world. One of the most common examples is a piece of technology you probably encounter most days—the humble barcode scanner.
Software oracles: these oracles collect data from web-based sources instead. They scan through a number of websites, providing the most recent data for the smart contract. In the context of the blockchain ecosystem, this data tends to come from crypto exchange websites.
These services can be divided further into one of the following two options:
Centralised oracles: these are single entities drawing information from one external source. Since these services only use a single node, they are more susceptible to attacks.
Decentralised oracles: these use multiple nodes, drawing data from multiple sources thereby increasing the validity and accuracy of the provided data.
Why are Decentralised Oracles Necessary to DeFi?
Now that we’ve explained what a blockchain oracle is, we’ll now consider its use within the DeFi ecosystem in particular.
DeFi, or decentralised finance, is a blanket term used to refer to peer-to-peer monetary services carried out over a public blockchain, most frequently the Ethereum network. Financial tools known as DeFi applications are built on this blockchain network. Altogether, these applications contain a total of 7 billion dollars in cryptocurrency, though this figure is on the rise—thanks to decentralised oracles.
Due to the nature of DeFi, decentralised oracles are prefered over centralised ones, as they are more in keeping with the principles underpinning DeFi technology.
What are the Risks Associated with DeFi Oracles?
Despite the fact that DeFi oracles are decentralised, they are not completely immune from risks. For one thing, even though decentralised oracles are more reliable than centralised ones, they can prove vulnerable to bribing, signalling, and other conspiratorial efforts on behalf of data sources.
In some instances, hackers have been known to attack the information feed directly. This is called a man-in-the-middle attack and is one of the more significant risks of using a decentralised oracle.
Decentralised oracles are becoming more and more popular in the world of DeFi. Though they are not without risks, these oracles are a preferable alternative to centralised oracles and are in part responsible for the impressive increase in DeFi’s total value locked over the past few years.
Here at Grapherex, we provide our customers with the opportunity to get involved with DeFi themselves by deploying their own nodes within the network. If this is something that would be of interest to you, or if you are looking to find out more about DeFi technology, we’d love to hear from you.