Decentralized Finance (DeFi) has taken the blockchain world by storm, offering new ways for individuals to access financial services without the need for traditional financial institutions. However, for DeFi to truly succeed, it must be able to interact with the real-world data that is necessary for financial applications to function properly. This is where Oracles come in.

Oracles provide DeFi applications with access to off-chain data such as price feeds, market data, and other critical information. Kadena has recognized the importance of Oracles in the DeFi vertical and supports projects that provide Oracle solutions.

In this article, we’ll be providing an overview of Oracle basics and how Kadena is leveraging them to create a more secure and efficient blockchain ecosystem.

Oracles are mediums that provide real-life data to blockchain applications, bridging smart contracts to external databases. They serve as a link between smart contracts running on the blockchain and external sources of data that are stored off-chain. They are responsible for retrieving, verifying, and transmitting real life data to the blockchain and enabling the execution of smart contracts based upon the inputs and outputs from the real world.

Essentially, Oracles provides a mechanism for triggering smart contracts. Without Oracles, dApps would only have access to on-chain data.

Here are some real use-case for Oracles:

Example 1

Let’s say there’s a decentralized application (dApp) for insurance that uses blockchain technology to store policy information and process claims. When a user buys an insurance policy, the premium is paid in cryptocurrency and stored in a smart contract. If the insured event occurs, the user can file a claim, and the smart contract will automatically process the claim and pay out the appropriate amount.

How does the smart contract know whether the insured event actually occurred? It needs an oracle mechanism to verify the event. For example, if the policy is for crop insurance, the oracle could be a weather data provider that reports on whether a specific region experienced a drought or flood. The oracle would provide the necessary information to the smart contract, which would then process the claim and pay out the appropriate amount to the user.

Data that is retrieved by oracles becomes immutable only when it is recorded on the blockchain. Who authenticates data provided to the chain? How do we know that the data is accurate and true if it is coming from centralized points that require third-party permissions? Clearly, there is a conflict between trust, security, and reliability of third-party oracles. This conundrum is called the Oracle Problem.

In order to prevail over this problem, oracles need to provide and guarantee the reliability and security offered by blockchains.

Solution: Decentralized Oracles.

Decentralized oracles alleviate the Oracle problem by not having to rely on a single point of failure. Their primary goal is to overcome the limitations of centralized oracles.

To achieve this, a network of nodes is used to obtain real-life data from several off-chain sources instead of one central source. This data is then transferred to smart contracts on-chain, enabling the integration of external information into the blockchain ecosystem. A decentralized oracle can be compared to a public library with multiple sources of information. By gathering information and data from multiple sources, it minimizes false or inaccurate data, improving trust and reliability. This enables them to deliver data in a trustless manner, ensuring greater accuracy, reliability and security.

Tellor is a decentralized oracle protocol that incentivizes an open, permissionless network of data reporting and data validation, ensuring that data can be provided by anyone and checked by everyone. In an oracle landscape dominated by fully centralized services, Tellor sets itself apart from other competitors by identifying and creating a need and creating an oracle.

Tellor is working with Kadena to develop an oracle service to support DeFi infrastructure on the Kadena blockchain and has completed the development of the oracle protocol in Pact, which you can view here. Tellor’s vision is centered on utilizing effective crypto-economic incentives to encourage anonymous participants to report data on-chain, while also enabling anyone to dispute this information. By discouraging malicious or erroneous actors, we aimed to create a streamlined yet resilient oracle. Moreover, Tellor aspires to design a protocol that is agile and adaptable enough to provide any data, anywhere.

Oracles are essential components in enabling blockchain technology to interact with the real world, providing access to real-life data to smart contracts. With the help of Tellor, Kadena can deliver real-world solutions that can solve complex problems in various industries from insurance to finance.

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