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digital daily: Oracles

The Oracle Speaks. The word "oracle" evokes mysticism. An anointed third party connected to the truth of the gods consulted for clarity. In the blockchain world, "oracle" refers to something broader -- connection to the outside world. Blockchains are self-contained. They have no ability to detect, decipher, or reason about information outside their digital walls. A blockchain can't request data either. Information has to be pushed in by an outside party. This is where oracles come in. They are truth-tellers from the off-chain world. The roadmap for blockchains includes a wide set of automatic services that interact with real-world information (here). Uses include gathering rainfall data to power parametric crop insurance, performing continuous audits of financial account balances, and verifying agricultural land use for carbon credits. Smart contracts can automate many processes that currently require time, effort, and double-checking -- if they have the right data available. But there is a long road ahead before we can realize broad, blockchain-based productivity gains. Today, oracles provide mostly token price feeds. MakerDAO, one of the first DeFi projects, oversees a long-standing token price oracle (here). Despite price feeds being a clear, well-tested application of oracle data, they also illustrate how oracles can be a primary source of risk. "Oracle attacks" in DeFi manipulate the perceived price of a token (here). Typically, the price manipulation only lasts a few seconds, but that is long enough to borrow against inflated collateral value, force a liquidation, or swap one token for another at a distorted ratio. With each attack, weaknesses are exposed, and oracles adapt. Many are diversifying the set of data providers to make manipulation more costly and harder to coordinate. Will it be enough? Oracle data is being integrated into a wider set of applications, and failures are few and far between, but the cost of each failure can be large. Users are often lulled into unquestioning reliance when the last hack fades from memory. Despite the challenges, we will continue to automate many parts of our transactional economy. Blockchains, smart contracts, and real-world data delivered by oracles will be building blocks in the next growth phase. Along the way, bad actors will show us our vulnerabilities if we watch carefully. The trick is to limit the damage while we learn the lessons.