Over the last month, the timeline of events in the cryptocurrency space has raised many essential questions from skeptics about digital assets and whether they are sustainable in the long term. On May 12, 2022, LUNA was a bloodbath in the cryptocurrency market, and its price plummeted to nearly zero, causing widespread concern worldwide. The result was the rapid collapse of TerraUSD (UST), the world's third-largest stablecoin, into a death spiral. UST is currently trading for less than $0.1. The crash of LUNA and UST wiped out over $40 billion in less than 48 hours, with analysts linking this "black swan event" to the 2007/2008 financial crisis.
Because of the high selling volume of $LUNA and $UST, there were many discrepancies across various platforms due to the inconsistency of the oracles, which led to exploitation by bad actors on the Venus protocol, resulting in a loss of 11 million dollars as hackers took advantage of the inconsistent prices on Venus. In this article, we'll look at the role of decentralized oracles in ensuring data accuracy during times of high volatility and the potential risks they can mitigate to avoid exploits and losses.
What are decentralized oracles?
Oracles generally are protocols in the blockchain industry that allow smart contracts to interact with external data. Oracles are third parties, and bringing them into a transaction may expose what was previously a straightforward transaction to external influence.
The current state of oracles in the blockchain industry effectively invalidates the entire system by removing the blockchain's trustless nature. In 2021 alone, hackers stole over $1.3 billion through oracle and bridge hacks, resulting from security flaws in existing Oracle protocols due to centralization, opening up a central point for hackers to exploit, and take advantage of.
On the other hand, decentralized oracles aim to uphold the trustlessness of the blockchain. Decentralized oracles are protocols that use distributed ledger technology to tighten security and reduce hacks caused by centralized oracle protocols. The approach of decentralized oracles has proven to be quite effective in securing smart contracts and enabling seamless off-chain data verification.
Decentralized Oracle Protocols in Web3
QED Protocol
QED is the next-generation decentralized oracle solution for the blockchain industry. It connects multiple blockchains, smart contracts, and off-chain data sources. It's a battle-tested and proven iteration of the Delphi oracle, operational for over 3.5 years. QED was created in response to the problems plaguing the blockchain industry's oracle protocols.
The QED protocol is blockchain-agnostic, which means it can be integrated with and scaled on any public blockchain. Furthermore, to eliminate underperforming oracles, QED also employs automated reliability scoring.
Witnet Protocol
Witnet is a reputation-based decentralized oracle network: nodes running the Witnet software earn or lose reputation when they fulfill a data request correctly or incorrectly, with correctness defined by a consensus algorithm that analyzes node responses. Nodes that disagree with the consensus lose their reputation (by going offline or attempting to be malicious), and the honest nodes share this reputation. Oracles, also known as "witnesses," are chosen at random by the Witnet protocol to mine and fulfill data requests based on their reputation score.
Band Protocol
Band Protocol offers "community-curated" data sources, allowing dApp operators to participate in data feed management and curation, solving the oracle problem, and providing smart contracts with reliable data feeds. Band Protocol is a cross-chain oracle network that enables decentralized applications (dApps) to integrate price and event feeds, effectively linking the virtual and real worlds. Since its inception in 2018, Band has attracted a lot of attention and is widely regarded as one of the leading decentralized oracles in the space.
Conclusion
The importance of decentralized oracles, especially in market conditions like this, cannot be overstated. Therefore, data accuracy has to be the utmost priority for DeFi protocols to mitigate the risks associated with high volatility, as witnessed in the LUNA crash.
