Oracle

Blockchains cannot access off-chain information on their own. Oracles fill that gap by collecting data from sources such as exchanges and data providers, aggregating it, and publishing it on-chain where smart contracts can read it. Decentralized oracle networks use many independent node operators and data sources to reduce reliance on any single party, and some also relay messages between chains.

Oracles are critical infrastructure for lending, derivatives, stablecoins, tokenized assets and prediction markets. If a price feed is wrong, delayed or manipulated, protocols can liquidate positions incorrectly or be drained by attackers, and oracle manipulation has caused significant losses in DeFi. Tokenized funds also use oracles to publish net asset values and proof of reserves on-chain.

For allocators, the design and security of the oracles a protocol relies on is a key due diligence item. Example: a lending protocol reads an ether price feed from a decentralized oracle network and triggers liquidations when a borrower’s collateral value falls below the required threshold.