The decentralized applications (dApps) that spread like endless tentacles through the defi landscape allow anyone in the world to permissionlessly lend, borrow, save, trade, and more using digital assets – all they need is an internet connection and a compatible Web3 wallet. The days when one had to make an appointment with a bank manager to open an account or apply for a loan seem to belong to antiquity.
Much of the credit for defi’s meteoric rise goes to the Ethereum blockchain and its smart contracts, self-executing agreements that eliminate the need for a third party. If Ethereum represents the building where the transaction occurs, smart contracts are the name above the door: no smart contracts, no defi. For this reason, they are often described as the backbone of the industry. Yet, there’s a second and perhaps equally important piece of the infrastructure puzzle that makes defi possible: oracles.
Why Blockchain Needs Oracles?
Whether it’s lending markets, decentralized insurance products, liquidity aggregators, derivatives protocols, algorithmic stablecoins or something else, the vast majority of defi apps rely heavily on oracles, middleware entities that connect smart contracts to resources outside of their native blockchains. Without oracles, blockchains are like computers without internet access – valuable but largely impotent on the connected and interoperable front.
Often referred to as hybrid smart contracts, the combination of blockchains (immutable on-chain code) and oracles (secure off-chain data) creates a powerful synergy that sets the stage for advanced blockchain applications. Oracles enable formerly enclosed networks to consume reliable external information and interact with legacy systems, resulting in smart contracts that can react to real-world events and integrate with established business processes.
Source: https://www.forbes.com/sites/lawrencewintermeyer/2021/10/14/cryptohacks-oraclesthe-invisible-backbone-of-defi-and-applied-blockchain-apps/?sh=3ad4f620182d
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