6. Oracles - Why is it essential for Defi to develop? Why does Phezzan need an Oracle?
This piece is written by @hasaki from Phezzan Discord server
1) Definition: What is an oracle and what can it do?
As a crypto user, I am pretty sure that everyone has heard about a thing called the oracle at least once. Briefly, the oracle is the thing that can bring real-world data onto blockchains, an intermediary that connects data off-chain with blockchain (on-chain). Specifically, Oracle is software or hardware that receives and validates external data into blockchain and smart-contracts, through methods such as APIs or market data. We can easily list many oracles right now suck as: Chainlink, UMA or API3. Chainlink is the biggest oracle, no doubt.
2) History of Oracle: The beginning of Defi
Chainlink was born in 2019. Before that time, nobody knows about Defi. At that time, only the CEO of Chainlink talked about Decentralized finance. In the other words, Chainlink has built Defi indirectly.
=> Oracle is Defi's foundation
As I have mentioned above, Oracles bring off-chain data onto blockchains. These data consist of real-world data ( the weather, the traffic congestion,... ), Crypto Market Data( Information on CoinMarketCap, CoinGecko such as price fluctuations, trading volume, ...) and Enterprise Services ( Information to serve the operation of organizations and businesses). Therefore, without the oracle, how can blockchains know what is the price of ETH today? How can they know whether the market fluctuates or not? And how can we build a DEX to exchange if it doesn't know the price of the assets? In more detail, in 2019, the price of ETH was determined by the investors on a centralized exchange, and Oracles helped blockchains know it. A lending protocol can know exactly the liquidation price of a loan.
=> Oracles are an indispensable part of Defi and Blockchain
4) Applications of oracle in defi
- A data source for smart contracts: As I have said, oracles can provide blockchains with lots of off-chain information
- Improve data reliability and accuracy: With decentralized oracles, dapp users can make sure that the price is transparent and accurate ( DEV does not interfere with prices for personal profit)
5) The risks of using oracles in Defi
- Price manipulation: If the hackers can attack the oracles, they can easily change the price of the assets on DEX to make their profit. Therefore, Oracles should be decentralized and have good security
- Slow speed in data retrieval: This can make the investor lose their money. For example, you see that the BTC price is crashed from $20000 to $10000, so you decide to buy some on Uniswap immediately. However, due to the slow speed in data retrieval, the BTC price on the blockchain is still 20000$ and you buy it without checking the price again. 1 second after you make the buy order, the BTC price on the blockchain goes down to $10000. Boom, your balance is halved.
6) Oracle application in the future ( to the real world )
- In business: Oracles can help the businessman manage his company's money flow transparently and accurately ( The real-world transaction can be read through blockchain thanks to the oracles). He will know exactly when the money goes out or in, whether the accountant steals the money or not.
- In government: The real-world data can be stored on the blockchain, and no one can change it.
7) The importance of oracles in Phezzan Protocol
Phezzan is a Defi app, so it will need an oracle. No doubt. Right now, Phezzan is using Chainlink - the best oracle. Chainlink will help Phezzan have the most correct price and the most accurate fluctuation. Therefore, Phezzan's users will not worry about the price and make sure that the price they see on Coinmarketcap will be the same as the price in Phezzan.