Oracles in the blockchain context might seem complex at first glance, but it is just a service that connects blockchains with the rest of the outside world. From a technical point of view, blockchain technology is very isolated. Let’s imagine that blockchain is a computer, a decentralized, very secure, expensive computer. Oracles can connect this computer to the internet and provide valuable data from the off-chain world. Data availability opens up many possibilities for dApps on blockchains, enabling functionalities such as synthetic assets hybrid smart contracts, lending and borrowing systems, and derivatives.
Oracles act as intermediaries between external data and smart contracts, not as a data source mechanism itself. They fetch, check, and pass on data like stocks, tokens, asset prices and many more. They need to do this in a way that maintains the key features of smart contracts: trust and decentralization. The challenge here is to make sure that the data they provide to smart contracts is reliable, and hard to manipulate, all while avoiding reliance on a single source or central authority.
Key Role of Oracles in DeFi and Smart Contracts
Most DeFi applications need oracles. They are crucial for smart contracts, offering needed data from various decentralized places across all sectors. dApps often need up-to-date pricing data for its assets to manage lending markets, create stablecoins, and offer synthetic asset exposure.
Without Oracles, these applications would be unable to securely and reliably collect data and access the necessary information, severely limiting their functionality and potential. One might wonder whether Oracles, operating behind the scenes, affect the average user of a dApp. Although the interaction is indirect, the impact is significant.
By providing reliable data, Oracles enable dApps to offer services that are accurate and reflective of real-world conditions. What’s more, well-optimized Oracles can significantly reduce gas fees for dApps and end users.
It is crucial to ensure that dApps, especially in the DeFi sector, have access to accurate and real-time pricing data for a wide range of types of blockchain assets. RedStone’s infrastructure supports thousands of different use cases for dApps and, thanks to its modular and future-proof design, always makes it seamless to integrate with.
Uses of Blockchain Oracle Technology in DeFi
Blockchain oracles are essential in enhancing the capabilities of blockchain smart contracts further, enabling them to interact with various external systems and data for a broad spectrum of applications among many sectors. Below are some of the most prominent blockchain oracle use cases witnessing significant adoption:
Decentralized Finance
Oracles serve as the backbone of the DeFi sector by providing critical financial data to smart contracts. For instance, they have supply chain and price information essential for lending platforms to evaluate borrowing limits and monitor collateralization ratios to prevent undercollateralization. Synthetic asset platforms rely on oracles to align the value of digital tokens with real-world assets. Moreover, new designs of Automated Market Makers (AMMs) utilize the price feeds from these oracles to adjust liquidity pools according to the prevailing market prices, enhancing capital efficiency.
Powering Lending Markets
Let’s examine a practical example: Morpho Blue is an immutable lending protocol with permissionless market creation. Features independent lending markets with single collateral and borrowable assets, priced via decentralized oracles only. Interest rates are determined by immutable models. Users can create markets with ERC20 assets and oracles of their choice governed by predefined parameters.
MetaMorpho Vaults, uses RedStone for specific vaults, and utilizes LST price data feeds native blockchain to guarantee precise and current pricing data for assets within lending markets. This cooperation with RedStone enhances access to liquidity and expands financial opportunities in the DeFi ecosystem. End users can benefit from blockchain data to form enhanced access to liquidity and expanded financial possibilities in the DeFi ecosystem.
Oracles Preventing Black Swans
Let’s use a real-world example: On January 1, 2024, Google’s search engine experienced a significant technical glitch that led to an unprecedented spike in the exchange rates of the Euro and Dollar against the Polish zloty, erroneously showing the Euro at PLN 5.56 and the Dollar at PLN 5.03. This abrupt increase, over 28% for both currencies, caused widespread confusion and concern, with speculations around political or external events and geopolitical triggers. The situation was exacerbated by Google temporarily halting the display of current exchange rates, leading to rumours and speculation about the cause oracle problem, including potential political statements or geopolitical events impacting the zloty oracle problem’s value.
Even Poland’s Finance Minister later clarified that the issue was due to a data source error on Google’s part, with normal exchange rates resuming once Asian markets opened, confirming the Euro at PLN 4.3450, dispelling fears stirred by the incorrect data sources.
The incident revealed vulnerabilities in relying on a single data source for critical financial information, as evidenced by the exploit on the ByBit crypto exchange. Traders capitalized on the inflated PLN rate to sell USD at a significantly higher market value, prompting ByBit to disable PLN withdrawals and fix the issue. You can learn more about it here.
The event underscores the importance of decentralized Oracles in safeguarding traditional systems against such “Black Swan” incidents. By aggregating data from multiple sources, Oracles like RedStone offer a more reliable median exchange rate than a single point, mitigating the risk of manipulation or errors from any single data point. This incident highlights the crucial role of diversified data aggregation hardware oracles in maintaining the integrity and reliability of financial data in the digital age.
Summary
Blockchain oracles bridge the gap between isolated blockchain networks and the external world, acting as intermediaries that provide essential data to decentralized applications. These oracles fetch, verify, and relay external information transfer data, such as financial data, to blockchain networks and smart contracts, enabling them to interact with the real world. This connectivity chain data is crucial for the functionality and expansion of various blockchain applications, particularly in DeFi, where accurate, real-time data is indispensable.
Decentralization in oracles is maintained through a network of independent nodes centralized inbound oracles themselves, which validate information collectively, thus ensuring data reliability and security. This method mitigates risks associated with data manipulation and single points of failure. Oracles play a pivotal role in DeFi by providing up-to-date pricing data necessary for lending platforms, synthetic assets, and other dApps. Their indirect impact on users is significant, enhancing the accuracy, security, and trustworthiness of dApp services. They also provide data to protect against “Black Swan” events by offering diversified data aggregation, ensuring the integrity and reliability of financial data in the digital age.
About RedStone
RedStone is a modular oracle delivering diverse, high-frequency data feeds to EVM Layer1, Layer2, Rollup-as-a-Service networks, and beyond, i.e., Starknet, Fuel Network, or TON.
By responding to market trends and developer needs, RedStone can support assets not available elsewhere. The modular design allows for data consumption models adjusted to specific use cases, i.e., capital-efficient LSTfi and early support of LRTs. RedStone raised almost $8M from Lemniscap, Blockchain Capital, Maven11, Coinbase Ventures, Stani Kulechov, Sandeep Nailwal, Alex Gluchovski, Emin Gun Sirer, and other top VCs & Angels.
