Centralized Oracles vs Decentralized Oracles: A comparison
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In the previous article, we already talked about the oracles and discussed all types of blockchain oracles. However, some of you may still wonder what are the differences between centralized and decentralized oracles, and which one is better. In reality, both types are employed by lots of blockchain projects, depending on their needs. In today’s article, we will dive deeper into centralized and decentralized oracles, and decide which one is suitable for your usage.
A Quick Review of Blockchain Oracles
Blockchain oracles are third-party services that act as a data provider to smart contracts. Since smart contracts cannot access external data itself, oracles are used to connect the real world data to smart contracts. However, you need to be clear that oracles are not data sources, rather, they are layers that verify and validate data on-chain and send aggregated data to smart contracts. The data provided by oracles can be price details, confirmation of transactions, etc.
Oracles play a vital role in helping smart contracts operate beyond their capabilities. In essence, oracles are the connection point or the link between the outside world and blockchains.
Having said that, there is an increasing interest in centralized and decentralized oracles as they are the most popular oracle types that are utilized by lots of blockchain projects.
Centralized Oracles vs. Decentralized Oracles
The classification of oracles can be based upon different qualities such as source, direction of information, and trust. For example, centralized and decentralized are classified using the “Trust” quality. Nowadays, many organizations and corporations find it difficult to decide between two different oracle types. This choice is significant, primarily from an operational perspective. Let's examine the differences between centralized and decentralized oracles.
Centralized oracles are a single entity that transfers data from the external world to smart contracts following a set of security measures. These oracles are the sole information source for smart contracts and are under the control of a single organization. Because it operates similarly to the conventional traditional system, where a single entity is in charge of everything, it presents a bottleneck issue, or a single point of failure. This makes smart contracts less resistant to weaknesses and intrusions. Moreover, these oracles have a straightforward design and need less infrastructure and maintenance. Despite offering defense against game theory attacks, their systems nonetheless are vulnerable to corruption and attack.
In contrast to centralized oracles, decentralized oracles do not rely on a single source of information, rather, they source data from multiple data providers and strive for trustlessness. Thanks to that, they can be able to boost the veracity and accuracy of the information delivered to smart contracts. Decentralized oracles can also be referred to as consensus oracles since the smart contract interacts with several oracles to validate the data. Additionally, decentralized oracles make use of the SchellingCoin technique, in which each independent source independently reports the data. However, this technique is susceptible to a number of issues such signaling, cooperation between parties, and even bribery.
Decentralized oracles are thought to be appropriate for companies with larger capabilities since it requires larger infrastructure and maintenance cost.
In essence, centralized and decentralized oracles have their own perks. Centralized oracles are slower, but they offer better security. On the other hand, decentralized oracles provide faster operations but are less secure compared to centralized ones. Therefore, DeFi applications can choose to use either type of oracles depending on their purposes.
DeFi Protocols Using Oracles
The goal of decentralized finance (DeFi) is to expand the potential of blockchain technology by converting conventional financial products into transparent, trustless protocols that operate decentralized without the need for middlemen.
Despite the fact that decentralized oracles lack security, it is widely accepted by several DeFi protocols. Indeed, decentralized oracles are necessary for the DeFi ecosystem since centralized oracles are incompatible with the philosophy behind DeFi apps and products. Because centralized oracles are comparably significantly slower, many apps and companies dissuade users from utilizing them as their primary oracle.
Compound, MakerDAO, Uniswap and Aave are some examples of projects operating on Ethereum Network that use oracles to access external data. Specifically, real-time asset pricing is handled by MakerDAO using Oracle. Oracle works by sending frequent price updates to an aggregator that establishes a median price, which is subsequently utilized as a benchmark price on the platform. Similar to how Compound utilizes Oracle to capture pricing data, which is subsequently sent to its price feed under administrator management and control.
It can be concluded that oracle is a reliable infrastructure that facilitates communication between smart contracts and the external sources. Without blockchain oracles, smart contracts would have to depend only on information that already exists in their networks, significantly lowering their potential.
From the discussion above, we can clearly see that decentralized oracles are favorable to most DeFi protocols. However, each project has to clearly define their purposes, needs and consider their capabilities to wisely choose a suitable type of oracles for their operation.
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