DeFi is the keyword of 2020. Many Decentralized Finance applications have risen this year that focus on disrupting the old traditional financial services.
They rely on blockchain technology’s decentralized nature to offer the most secure and reliable services to customers. From lending and staking platforms to those who provide more straightforward payment solutions, DeFi is here to stay and start another revolution with blockchain.
Underlying Technology
Smart Contracts play a vital role in the DeFi ecosystem. They automate the financial processes and are considered as the underlying management components in many – if not all – of DeFi applications.
While they offer a high level of automation and reliability to the whole system, there has always been a weak point in the integration process. Smart contracts could only access data from their blockchain. So, they couldn’t serve the customer with real-world needs.
For example, if a customer wanted to receive a service based on fiat money’s value, DeFi wasn’t able to calculate the real value. It needed a third-party to provide the data from outside of the blockchain – off-chain.
Oracle is the solution that helps smart contracts connect to external sources of data. It doesn’t matter which blockchain a DeFi runs on. It can access data from other blockchains and even off-chain sources using an oracle.
The Importance of Oracles
The importance of oracle for smart contracts and DeFi shows itself in the trust and transparency concepts. People who use DeFi for their financial needs, want a higher level of trust and more importantly, verifiability.
You cant lock your holdings to get a cryptocurrency loan on a service that doesn’t offer accurate and secure price data. If you are locking ETH to receive a loan in DAI or any other stablecoin, you have to be sure about your ETH’s correct pricing. Oracles offer this accurate price by connecting DeFi to other blockchains and even off-chain sources.
There are multiple oracle providers in the blockchain community. Chainlink and Band Protocol are among the decentralized ones that experienced an eye-opening growth in 2020.
Their tokens, LINK, and BAND have seen %452 and %3,296 growth in 2020. It shows the growing interest in these services that surely is a result of growing interest in DeFi.
Looking at The Future
Blockchain oracles are crucial for DeFi applications. They provide a vital stream of data that acts as the base of decision-making and triggering smart contracts.
Many Defi protocols offer their oracles, but most developers prefer decentralized ones like Chainlink and Band Protocol. The Decentralized nature of an oracles makes it more reliable for those concerning the security of the solution.
Anyway, hackers have an eye on oracles to alter their data streams and cause problems for the Defi.
The growing interest in DeFi and the increasing need for oracle solutions show a bright future for these fields. After all, security always remains a big worry, and developers should keep in mind that their services’ success highly relates to the level of security and trust. Maybe decentralization is the best answer to these challenges.
