Top 5 Most Common Oracle Applications in Blockchain
Oracles connect blockchain to the real world and enhance the interoperability of blockchains. The use case of oracles in blockchain is endless, but let's take a look at the top 5 most common ones.
Decentralized Finance (DeFi)
DeFi is probably where oracle is first applied and most widely used. Oracles will feed financial data such as market price and other properties of digital assets. In normal situations, we only think that financial data would let us know the correct asset price and help us trade in an efficient way. Yet, the use case of oracle in DeFi is much more diverse.
Some people with bad intentions may want to target DeFi to make a quick buck because transactions in this realm cannot be traced to any entity. There are many instances where such folks exploit the pricing abnormalities of one or a few protocols to arbitrage and take profits, impacting the asse t prices, protocols, and other investors negatively. A good oracle can step in when smart contracts detect any price irregularities, call on price feeds from various sources, and adjust the asset price accordingly.
Another use case of oracle in DeFi is to combine liquidity from various protocols and ensure the same asset price across all chains so that lending protocol can offer better liquidity for users and liquidate overleveraged positions when price changes.
Celsius, another lending protocol, found themselves in need of a secure, decentralized, and automated way to audit reserves that back their wrapped tokens. Thus, they incorporate Chainlink, the most popular blockchain oracle, to automatically conduct real-time audits.
Non-Fungible Tokens (NFT)
You may ask why NFT needs to have oracles. They are non-fungible (aka each unit is non-exchangeable as equals), so there is no need for a price feed to maintain the correct asset price.
Well, that's not true. NFTs, oftentimes, are not as frequently traded as other tokens, so it is more difficult to track price data, especially if it has been moved from one chain to another.
As changing the chain of an NFT is not very common yet, more popular oracle use cases in NFT are very different from that in DeFi. The most widely adopted application of oracle in blockchain is probably the provable random NFT creation and distribution. In terms of NFT creation, oracle can randomly assign different metrics and attributions to each newly minted NFT. This makes sure that any NFT created is indeed rare and one-of-a-kind.
Other than price data, oracle can also provide information about the creator of an NFT asset or its transaction history.
GameFi / Play-to-Earn (P2E)
GameFi, also known as Play-to-Earn (P2E), is basically the combination of game, NFT, and DeFi, so oracle is a must-have if you want any GameFi to operate securely and properly.
Likewise, oracle use case in GameFi is the combination of both DeFi and NFT. However, in the case of GameFi, true randomness, which guarantees fairness in the game, is perhaps more important than other use cases of oracle. Therefore, oracle helps GameFi do the following things in a provably unbiased and random manner:
(1) generate and attribute characteristics to an item or a game character
(2) distribute game items and characters to users
(3) choose winner(s) in a raffle
Prediction Market and Betting
Prediction market is where predictions are traded based on real-world events, and the market price indicates the expectation of the public on a certain topic. The majority of the prediction market at the moment are centralized and limited in the sources that create prediction scenarios. This does not only limit the quality of the market, but also limit who can join the market. Usually, whales and regulators act as gatekeepers, getting to decide who can participate, what they can do, and what fees participants are charged (often ridiculous layers of fees). Blockchain and oracle can revolutionize the prediction market and empower everyone to trade whatever, whenever, wherever they want with minimal fees. In this market, oracle plays the crucial role of providing real-world information in a decentralized manner, enabling users to freely take part in a peer-to-peer, trustless, yet unbiased environment.
Betting and prediction games, a special type of P2E, require a lot of activities from oracles. Especially, if the game bets on the outcomes of real-world events like the prediction market, such as the result of a football match or the number of votes from an election, then oracle is required to provide such results to the blockchain game. Before blockchain and oracle, it was almost impossible to have a trustless and fair prediction or betting game. Now, thanks to these technologies, the dream of an unbiased bet is coming true.
Insurance is one of the fields that benefit greatly from blockchain technology. Because of its unique way of storing and retrieving data, insurance data is secure, immutable, and traceable. As insurance cannot be assessed and paid without proper real-world data, oracle is imperative. Oracle is used to feed information such as accident, flight delay, weather data, etc. to help the insurance blockchain protocol validate insurance claims.
Disclaimer: All products and projects listed in this article are not endorsements and are provided for informational purposes only.
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