Oracles, the data validators for Blockchain
We talk more and more often about DeFi and Blockchain, but the blockchain alone does not make any sense.
Let me explain: if we do not have verified data that can activate Smart-contracts, Blockchain is reduced to a simple public file with the peculiarity of data protocolization.
A bit limiting, don't you think?
Smart contracts, to work, need data that, more often than not, is off-chain; in the sense that they are data produced by other entities and therefore their reliability is not certain.
In order to certify that the data required by the Smart-contract is accurate and reliable, Oracles are used (and required).
These oracles are nothing more than lines of code, therefore software (although in some cases it is a real processor) that receives data from abroad and validates it through APIs or the crossing of market data.
One of the peculiarities of smart contracts, and it is the main characteristic of decentralization, is the autonomy of activation and operation when a condition occurs.
For example (and this is the first smart contract ever) payment for a software license: the smart contract receives the payment, then it can start (or continue) using that particular program.
However, the bank transfer counter is not on the chain, because it is part of the world outside it, part of a system that is unknown to it (the block chain).
In order for the transfer counter to reach the Smart-contract, oracles come into play.
The oracle will have to take the meter, verify it with the current account to which it was sent and confirm or not the veracity of the payment.
Let's assume for a moment that Oracle skips the credit checks on the sum and assumes, since I have submitted an official document, that I have paid for the license. Unfortunately, I do not have sufficient funds to process the transaction and it is cancelled; obviously, since the Oracle must personally verify certain dynamics, my bank does not bother in the least to communicate the SBF to the oracle.
I continue to use the program without having the slightest right, in fact the necessary fee has not been paid for not being available.
It is logical to assume that if this misunderstanding happens to 1 person, it is not bad, but if it happens to half of the people who are using the service, the company would suffer a lot of damage.
This is a simple example to broadly understand the importance and operation of the Oracles.
DexToken makes extensive use of Oracles, in fact we could call them the protocol engine; in fact, to activate the Smart-contract managed by the Speculative AMM, it is necessary to know the current value of the token.
Link is currently the pioneer in the design of Oracles, in fact let's say that Link is the leader in the development of Oracles; in fact, many DeFi applications are based on ChianLink Oracles.
In the first place, Binance, in order to make its data accessible and verifiable, has relied on ChainLink technology, which through its Oracles makes its verified and, consequently, certified data available to other Blockchain realities.
For more information on ChainLink technology, I refer you to my column E&S Accessible Cryptocurrencies: here and here the articles dedicated to ChainLink.
Along with ChainLink it is also necessary to point out Band as a project; in fact, it is one of the first projects to leave the Ethereum Blockchain to trust the Cosmos Blockchain. Band's goal is to be able to connect real-world data to smart contracts.
For this reason, Band has seen a 100x increase, for DeFi, cross-chain data is vital, and Band is what it does for it; Band, however, has a very dangerous aspect that must be replaced: unlike ChainLink that puts the Oracles in contact with the protocol, for data verification and confirmation; the data provided by the Band of Oracles is considered correct, regardless and the verification will be carried out later.
It's basically based on trust, and I don't think that's fair.