The Importance of DeFi and Decentralized Oracles

Decentralized finance has been one of the biggest growing use cases in cryptocurrency. While many other applications struggle to gain real-world adoption, decentralized finance has continued to push new products, use cases, and utility that can revolutionize the industry.

Smart contracts are the main reason all of this is possible, they automate services and cut out third parties from many equations. Platforms like Uniswap use smart contracts to facilitate trades without the need for intermediaries. Other platforms like AAVE use smart contracts to conduct loans and provide a yield to stakers. 

A smart contract lives on decentralized blockchains such as Ethereum and Cardano. It is essentially a set of functions that rely on inputs to automatically deliver outputs. It does not possess the ability to gather data itself but relies on transactions to provide this data. Many of these contracts cannot function without data inputs.

As an example: decentralized car insurance. Customers can stake their funds and in return, they can receive coverage for their vehicle. But there is not a one-size-fits-all for car insurance.

There are many factors that go into evaluating policy prices for insurance, such as, the price of the vehicle, the driving record of the customer, the age of the driver, the location of the vehicle, and much more.

In order for a smart contract to properly evaluate a policy price, this data would need to be provided to the smart contract. This would be done through oracles.

Oracles are a tool used to deliver data. When one searches the local weather on Google, the website will use an oracle to deliver the data from a weather provider to your search result.

Most of these oracles are owned by private companies and ultimately decide which data to provide or not provide. This is where the issue lies. If decentralized applications are going to change an industry, there will be many legacy companies that will aim to stop this from happening.

Governments can regulate and stop oracles, private companies can lobby against the data being provided, and much more. If they can stop the data, they stop the application from working. This is a central point of failure and destroys the fabric of decentralized applications.

This is why decentralized oracles are key. If you can build a structure that can provide data to smart contracts without the use of private companies, you can build an application that can continue to run indefinitely.

There are many projects aiming to do just that, such as Chainlink, Razor Network, Band Protocol, and more. Should they prove to be successful they can be the backbone of a decentralized world.

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Updated: 11/10/2021 — 21:00