Oracle in DeFi and why it matters
DeFi was born as a set of financial tools that are being built on top of blockchain networks. Most of them are open-source protocols or modular frameworks that allow the creation and issuance of digital assets. They are designed to confer notable advantages of operating on a public blockchain like censorship-resistance and improved financial access services.
Financial services need access to data to tale certain decisions; however, blockchains don’t have access to information that is not on-chain, aka, off-chain data.
Oracles came to life to get that data into smart contracts. They either bring it on-chain for smart contracts to read from or pushes the data into the smart contract directly. Typically these are third-party services or manual interactions from your system within the chain — notwithstanding, both of these are centralized.
It is important to understand that using centralized methods on DeFi would kill the whole process. If an oracle is corrupted, it could play against the system and manipulate the data or censor it for its own financial gain.
Decentralizing this process through which off-chain data gets used on-chain is critical to having a secure contract.
|Rodrigo Quan Miranda
Co-Founder @ MantraDAO
Software Engineer @ Aave
Community Director @ Chainlink