What Is the ‘Oracle Problem’ in DeFi?
The 'oracle problem' is the challenge of securely and reliably getting external, off-chain data into a trustless smart contract environment. The problem is that while the smart contract is trustless, the data feed itself is a single point of failure and could be manipulated or inaccurate.
Solving this requires decentralized oracle networks (DONs) that use cryptoeconomic incentives to ensure data integrity.
Glossar
Cryptoeconomic Incentives
Design ⎊ The deliberate structuring of network rewards, penalties, and fee distribution models to guide the behavior of participants, particularly block producers and validators, toward outcomes that benefit network security and decentralization.
Oracle Problem
Discrepancy ⎊ The Oracle Problem, within cryptocurrency and derivative markets, represents a fundamental challenge in bridging off-chain real-world data with on-chain smart contracts, creating a potential for systemic risk.
Single Point of Failure
Concentration ⎊ In crypto derivatives, this risk materializes when excessive collateral or governance control resides with a small number of entities, such as a few large liquidity providers or key developers.
Decentralized Oracle Networks
Architecture ⎊ Decentralized Oracle Networks (DONs) represent a robust infrastructure designed to provide reliable external data to smart contracts without relying on a single, centralized entity.