Blockchain technology is revolutionizing the way we interact, transact and share information, with many experts predicting it will be the most disruptive technology in the next decade. After little structural innovation since the 19th and 20th centuries, decentralization has brought industries such as finance, media and technology closer to transparency, freedom from intermediaries and heightened efficiency.
Traditional enterprises rely on a centralized closed-door structure. In contrast, decentralized finance projects are being built with the ethos that governance should be decentralized and democratic. Transitioning society to decentralized platforms can make many services safer, more accessible and more transparent than ever before. The increasing interest in the space speaks to a collective desire to have more control over critical elements of our lives, especially our finances.
While decentralization helps to solve issues like transparency and efficiency, the lack of a trusted central authority means that decentralized applications, or DApps, must rely on third parties to supply data to execute transactions or application functionalities such as taking out a loan. Access to reliable, trusted information such as price feeds, real-world events and identification, among many others, underpins the reliability, strength and efficiency of a decentralized application.
The security to protect this data comes from an oracle solution that is able to reliably and effectively connect real-world and off-chain information with decentralized applications and smart contracts in a verifiable, manipulation-resistant manner. With more than 1 million regular users of DApps globally, there is a huge demand for reliable data external to the blockchain because it underpins the security of DeFi applications and the billions currently locked in the space.
Following hacks, attacks and data manipulation, the challenge facing blockchain technology is creating trust and building secure systems in the absence of established enterprises or government regulations. This is where new technologies like data oracles are essential to create a secure link between traditional companies with reliable price feeds and the decentralized ecosystem.
Connecting the old and the new
Data oracles act as the bridge between decentralized blockchain applications by aggregating and connecting real-world data to smart contracts. These decentralized applications then use smart contracts that self-execute when certain criteria are met, such as liquidating collateral, which requires a price oracle. In the absence of a centralized authority, data oracles are essential to connect blockchain-based applications with the information required to execute these smart contracts.
The use cases for smart contracts and oracle technology are extensive and span across insurance, real estate, healthcare and, most importantly, the DeFi space, where a security breach could put millions at stake.
In DeFi, instances of hacks are plentiful. Data oracles are the input to the logics of smart contracts and therefore dictate their behavior: the output. If the data oracle input is incorrect, this leads to unintended behavior from the smart contract and can result in losses of funds or other undesired outcomes, as seen even in the strongest DeFi projects. These structural problems make widespread adoption of data oracles essential.
There is a desperate, critical need to connect Web 2.0 to Web 3.0, to create a more resilient, efficient, censorship-resistant internet. Traditional companies built on Web 2.0 are not yet structurally ready to make the transition into DeFi due to the learning curve, know-how and organizational flexibility required. These traditional enterprises will require seamless onboarding processes with a high level of flexibility and customizability to act as a bridge to Web 3.0.
This is where novel oracle technology will come in, providing the support and systems for enterprises to make the leap into Web 3.0 without the businesses themselves having to grapple with the process.
While DeFi has undeniably boomed over the past year, the space still requires broader adoption by the majority, who have no coding expertise, as it is this accessibility that will create a truly robust DeFi ecosystem.
Traditional enterprises also stand to benefit greatly from this transition, as their data is a valuable resource to decentralized applications and an innovative new revenue stream ripe for market capture as the industry continues rising.
Why we must incentivize traditional enterprises to the blockchain
Many decentralized applications require real-time information such as price feeds, sporting results, weather and news updates to function. Traditional enterprises that can supply reliable real-world data must take advantage of this growing demand by connecting with decentralized applications and commercializing this data through a reliable data oracle. Tech and media giants like Google and Bloomberg, for example, would benefit hugely from the use of a data oracle.
This is an exciting step for the industry, as when large enterprises dip their toes into DeFi, it adds extra security and legitimacy to the space. In turn, this transition will create an additional source of income for these established businesses in a new, thriving industry. Traditional enterprises have no choice but to enter the space or risk being left behind as the world continues to adopt DeFi, DApps and smart contracts.
Connecting directly with data sources is the best way for companies to ensure the security and integrity of their data — which simultaneously strengthens the overall security in the DeFi space and the entire decentralized ecosystem. Oracles play a very important role in this process and in building trust in the DeFi and wider blockchain industry.
The future is decentralized
We are already seeing many large enterprises incorporating decentralized technologies into their business models. It is up to the leaders in the DeFi space to engage and guide these traditional businesses for there to be significant change and evolution. It is imperative that the industry prioritizes usability, simplification and community education to experience the widespread adoption DeFi is gunning for. The future is decentralized, and there is so much room for the industry to grow — we are only at the beginning of the revolution.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Kevin Lu is the head of business development and growth at Band Protocol, a Sequoia-backed cross-chain data oracle platform. Previously, he was the creator and writer of Protocol Weekly/DeFi Weekly, a newsletter to showcase the progress of different Ethereum layer-two protocols and decentralized financial projects.
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