Learn What Oracle On DeFi Is About
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Learn What Oracle On DeFi Is About

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Learn What Oracle On DeFi Is About

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Oracle On DeFi

Oracles are one of the terms that are often heard in DeFi. What is an oracle? Below, we discuss the complete and simple understanding about it.

But, before we discuss this further, you can register to become a member of Indodax.

Oracles are third-party services that allow smart contracts on the blockchain to receive external data from outside their ecosystem. While not a data source, an oracle is a layer that verifies on-chain data related to real-world events, then sends the cumulative data to the smart contract.

Oracle is the mainstay of companies operating in decentralized finance for real-time on-chain data. The need arises because blockchain does not have on-chain data stored in its ecosystem.

Oracles are intermediaries that ensure trust in the DeFi ecosystem where DeFi is a financial system mostly built on Ethereum 2.0. It has become important, especially oracles which are decentralized because being centralized goes against the ethos of DeFi’s product/application.

The increasingly popular hybrid DeFi protocol, which offers a decentralized network while eliminating volatility, operates by linking crypto assets to conventional financial instruments.

Strong security based on game theory in contention can offer a solution. Blockchain oracles are vulnerable to attacks from rogue hackers who want to exploit price anomalies by targeting them. Oracle is vulnerable to this attack because it is theoretically outside the blockchain consensus mechanism, and as such, the blockchain security mechanism does not apply to it.

Open lending/borrowing protocols such as MakerDAO, Compound, and Aave use oracles to retrieve external data while running on the Ethereum blockchain.

Spearheading the domain of oracle development are platforms such as Chainlink, Band Protocol, and Compound, with its Open Price Feed. Chainlink has partnered with giants such as Google, Oracle Corporation, Gartner, and even China’s Blockchain Service Network, and it’s also in talks with SWIFT, which is the global standard for communications between financial entities.”

MakerDAO is one of DeFi’s most popular open lending protocols, and its Dai token is pegged to the US dollar and is backed by crypto assets. MakerDAO uses the Oracle module to determine asset prices in real-time. This module consists of whitelisted addresses and an aggregator contract. It sends periodic price updates to the aggregator determining the median price, which is then used as a reference price on the platform.

Compound is a money market protocol that allows users to earn interest and / or borrow assets on collateral. Similar to MakerDAO, Compound also uses oracles to collect price information which is then passed on to its price feed, which is managed and controlled by an “administrator” who is the original token holder of Compound, COMP.

Okay, that was the explanation and understanding of oracles. Don’t miss out on other interesting information and articles on Indodax.academy.

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