The purpose of this article is to try to explain to people who have never heard of the concept of Oracle what the Flux Protocol is and why it has a great future in simple language.
Introductory block
In order to understand, we will need to understand some terms.
Oracles are third-party services that provide smart contracts with communication with external sources of information, i.e. they act as a bridge between blockchains and the outside world.
Blockchains and smart contracts cannot access data on the off-chain (outside the network). However, for many contracts, it is vital to have the ability to extract relevant information from the outside world in order to comply with the terms of the agreement.
Under such circumstances, oracles come into play, since they provide a link between external and internal sources. Oracles are an extremely necessary element of the blockchain ecosystem, as they expand the capabilities of smart contracts. Without oracles, smart contracts will be extremely limited, since they will be able to access data exclusively within their network.
Blockchains cannot themselves collect data from the external environment and share information with it. For example, a smart contract for the exchange of cryptocurrencies does not know how much a coin is currently worth on the market and at what price it is necessary to make an exchange. This is much like a computer that is not connected to the Internet.
It is worth noting that the oracle itself is not a data source, it is rather one of the layers that requests, verifies, and authenticates all the readings from external sources, and then retransmits this information. There are different types of data transmitted by oracles: price information, successful completion of a payment, or temperature measured by a sensor.
To request data from outside, you need to activate a smart contract and spend network resources on it. Some oracles also have the ability not only to transfer information to smart contracts but also to send it back to external sources.
Why do we need blockchain oracles?
The ability to access external data greatly increases the functionality of smart contracts and decentralized applications.
For example, the DeFi sector would be impossible without blockchain oracles. Decentralized financing relies on accurate, verifiable data. Lending, derivatives, insurance, and trading-all this requires data on the quotes of various digital assets. For example, blockchain price oracles collect data on the price of tokens from crypto exchanges — thanks to this, lenders in DeFi protocols know the amount of collateral.
It is important to understand that oracles are not a source of information, but only their supplier.
First, the oracles collect external data and process (verify) them. Such data can be any condition of a smart contract: the value of a coin, the execution of a payment, or the current state of the blockchain network. At this stage, the oracle’s task is to select the information correctly and make sure that it is correct. For example, you can choose the current cryptocurrency exchange rate among dozens of quotes on different trading platforms.
Another important function of oracles is to transmit data in the correct format so that various systems (blockchains, decentralized applications, trading platforms, IoT devices, and so on) can interact with each other. The blockchain network cannot simply communicate with any other system, since they often use different programming languages and have different system requirements. But thanks to the oracles, different blockchains can be compatible.
Example of using oracles
Let’s assume that Katya and Sasha are betting on who will win the US presidential election. Katya believes that the Republican candidate will win, and Sasha believes that the representative of the Democrats will win. They agree to the terms of the bet and lock a certain part of the funds into a smart contract, which provides a win to the winner based on the election result.
Since a smart contract cannot interact with external data sources, it is completely dependent on the oracle to provide it with the necessary information, in this case, this is the result of the presidential election. After the election is over, the oracle submits a request to a trusted API to find out which candidate won, and passes this information to the smart contract. Then the contract sends the funds to Katya or Sasha, depending on the result.
If it were not for the activity of the oracle relaying data packets, there would be no way to determine the winner without third-party intervention.
Conclusions from the introductory block
Now you understand that oracles are vital for any blockchain ecosystem for their development. Without external and verified data from the oracles, the blockchain system could not create new products for widespread implementation in our lives.
Problems of oracles
Despite the obvious advantages, blockchain oracles carry a lot of risks. For example, oracles are the main security problem of smart contracts. Decentralized blockchains, such as Ethereum, were created in order not to depend on third parties. But the oracle is just one of them.
The main task of oracles is to provide the most reliable information. For example, the simple answer to the simple question “how much is bitcoin worth now” can be very different: it depends on the trading platform and the exact time. If the oracle data is distorted, the smart contract will not work correctly, and the entire blockchain system will suffer. This is one of the obstacles to the wider implementation of smart contracts in the blockchain network.
Centralized blockchain oracles carry the most serious risks. They are easily compromised and are more susceptible to manipulation than decentralized solutions.
For example, earlier, among the main DeFi vulnerabilities, attacks on centralized price oracles were recorded, which collect information about the price of coins on different exchanges for DeFi protocols (this is how the loan security amount is calculated). But centralized oracles rely on only one source of information. If there is an exploit in the code of the DeFi protocol, an attacker can deceive the oracle and the smart contract relying on it-then the coins will be sold at other rates that are beneficial to the criminal.
Thus, hackers manage to withdraw tens of millions of dollars from the protocols of decentralized finance. The developers are well aware of this problem, but do not yet understand how to solve it. Therefore, hackers can withdraw money from any DeFi protocol that relies on a centralized price oracle. In this regard, decentralized oracles are gaining more and more popularity, for example, Chainlink, Band Protocol and of course Flux Protocol.
Conclusions: oracles, as we said earlier, are necessary for the development of the blockchain industry and at the same time are a security threat, with the help of which attackers can manipulate information coming to smart contracts and extract many millions of benefits.
How is Flux Protocol going to deal with these threats and why is Flux Protocol a new level of security and understanding among all oracles?
Let me answer this question only in simple words, and then there is an official data source where you can find all this information in a more scientific format.
First of all, the Flux Protocol is a decentralized oracle, which means that when choosing the outcome for a particular event, information from many sources is used, not from one.
In addition, the Flux Protocol is an Aggregator of Oracles, which means that the Flux Protocol also processes huge data streams of many other oracles, comparing them and choosing the final correct outcome of the event, which almost 100% eliminates the possibility of hacking by data manipulation for intruders. Simply put, if you need to deceive the Flux Protocol aggregator of oracles, you will have to conduct a cyber attack on all sources of received information at the same time, and this is simply not possible, because there will be a lot of such sources.
The Flux Protocol has the latest and strongest dispute resolution mechanism built-in, that is, if your data source gives out false information, you will pay for it. This was the case with other oracles before, but it was the Flux Protocol that combined all the known mechanisms for a more secure system.
And also take a look at the following slides.
The conclusion from the whole text is in simple words: Flux Protocol is a new data level for blockchains and smart contracts with the highest level of data security, and the largest amount of information. I think that Flux Protocol has a great future in the industry, so I wish you to closely follow the project.
Thank you for your attention, the author of the article telegram: @shashz, discord : @Z420#9311 .
All useful links :
Website: https://www.fluxprotocol.org/
Telegram: https://t.me/fluxprotocol
Twitter: https://twitter.com/fluxprotocol
Discord: https://discord.gg/4aWk2Zf7
LinkedIn: https://www.linkedin.com/company/flux...
Docs: https://docs.fluxprotocol.org/docs/
