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What is Oracle in DeFi?

BitForex Editor
Aug 28, 2020

For what would be seen as an answered prayer for the open cryptocurrency infrastructure, the new decentralized finance (DeFi) made her entry with the singular desire to make crypto activities free of intermediaries. Simply put, Oracle DeFi is all about decentralized finance intending to secure independence and access to assets like information, money, etc. Because freedom in financial activities comes when there are no third-parties and Oracle DeFi was designed to give that flexibility on the blockchain. Ensuring that activities here are devoid of any form of a centralized system or Government control which is what makes it most appreciable.

In the corridors of cryptocurrencies, DeFi is basically a universal term used to describe the decentralized permission-less financial substance. Since its emergence, several open financial forums have welcomed and used it in offering their users various services like trading and lending.


What comes to the human mind at the mention of the Oracle is probably a deity of some sort, but in the crypto world, they are codes that integrate the blockchain with the real world. They supply the smart contracts the information needed to successfully complete transactions. But what makes oracle most interesting and unique is the fact that they are intermediaries designed to eject intermediaries, and they are also smart contracts.

While smart contracts are simply computer programs preserved on the blockchain and to satisfy your curiosity on its relationship to Oracle. Take a look at this scenario, someone created a sport betting App on Ethereum and you and your friend make a bet of $50,000 on a specific variable of BTC/USD. The bet was to terminate at the end of the game with both of you choosing your supporting teams. This of course ends with the Ethereum getting locked in a smart contract to deliver to the winner at the end of the game. Now, the big question, how did the ETH know the winner? This is the very work of oracle. So, in essence, an oracle is the program that a smart contract relies upon to tender the unknown information.

More than a glimpse of oracle in DeFi

From its inception, cryptocurrency vowed to make payment and financial transactions universally possible without the help of third parties or trusted bodies. Decentralized finance (DeFi) emerged to enlarge that promise with the innovation of oracle. As you would already know, blockchains are not privileged to have information that is not on-chain. For example, the data on the internet and the rest are not on-chain. So, for smart contracts that survive on the blockchain and only depend on on-chain data, it means they have to be some other means to access and interact with the outside world.

This is the very birth of Oracle. Oracle is the source of information that allows you to feed data into your smart contract. How? It can bring the data on-chain for you to see or channel the information directly to your smart contract.

Why you should love Oracle in DeFi

Holistically, decentralized finance comes with tons of benefits over the traditional finance system.

1.It inhabits all blockchain properties and gives more meaning to it. Properties like accessibility, openness, decentralization, and censorship prohibition/resistance are the facts that make this system lovable.

2.It allows for an interface, interaction, and worldwide participation irrespective of social status.

3.It is flexible as earlier mentioned, allowing for experiments and the combination of different financial apparatus.

4.DeFi is created on top of a blockchain and it makes room for speedy and inexpensive financial transactions and automation.

5.Users are given complete freedom to their wallets as indicated in the non-custodian blockchain ecosystem. What this means is that every user is in control of his/her money without a trusted third-party.

6.The transparency of the ecosystem is a huge credit as well and it has decreased principal risks.

Types of Oracles

Software and hardware

Software Oracles gather data from internet sources and applications outside of Ethereum to the smart contract. More digital sources like weather data, flight schedules, backend API, sports activities, and results.

While hardware oracle collects data from physical gadgets like scanners, Internet of things IoT, and sensors. These devices are responsible for tracking, scrutinizing, and confirming real-world data before transferring them to the smart contract.

Centralized and decentralized oracle

Centralized Oracles are oracles that supply data to the smart contract. And by nature, centralized oracles are susceptible to some threats which have succeeded in making them less attractive to smart contracts. Because of these anomalies centralized oracles have proven to be insecure and poses a threat to a smart contract.

On the other hand, decentralized oracles are oracles with proud networks that flaunt their integrity as networks devoid of corruption. And they do not need trust and have been tested and verified by smart contracts as possessing unique qualities similar to blockchains like Ethereum and Bitcoin.

Inbound and outbound

Inbound Oracles are known to take the form of both software or hardware but they simply collect data outside the blockchain and feed it to the smart contract. A typical example is seen in how an inbound oracle collects information of a football bet to a smart contract thus enabling it to pay your friend that won the bet.

Whereas, the outbound Oracle takes data from the blockchain to the outside world.

Top concerns of Oracle

As interesting as Oracle looks it is normal to be skeptical and wonder if there are things to be wary of. Normally, since smart contracts rely on oracle for information, it is natural for it to trust every information and act upon them. It would be unfortunate to have a hacker or a malfunction in the source of the information? This is just one concern that programmers are tirelessly working to prevent in the future.

Conclusively, it is not wrong to have users rest their arms on Oracle DeFi and smart contracts because it saves time and minimizes third-party interference which is wonderful. But a complete analysis of the ups and downs of the system is important to guide you as you embrace the DeFi Oracle.

About BitForex:

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BitForex is programmed in a way that it can quickly adapt to the changes of the Crypto market while introducing new features like margin trading, enhanced trading charts,  derivatives, and a host of others. The headquarter of BitForex is located in Hong Kong, while there are branch offices in countries like the United States, South Korea, and Singapore.

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