Introduction
Staying updated on the financial landscape in a crypto-dominated environment calls for the understanding of various tools and instruments. One such tool assists in providing price information during liquidation in lending protocols. This tool is known as the ‘Oracle’.
What Is An Oracle?
An oracle refers to a 3rd party information resource that acts as an interface between blockchain and the off-chain world. In the context of lending protocols, oracles provide crucial data to assess the level of risk in lending agreements and liquidation processes.
The Role Of Oracles In Lending Protocols
In lending protocols, oracles maintain the stability and functionality of the protocol. They integrate external data, such as the price of crypto assets, into the blockchain, which helps automate processes, reduce risks and make smart contracts much more effective. Particularly during liquidation, the price information supplied by oracles helps determine whether a loan is safe or in danger of being liquidated.
Prominent Examples Of Oracles
There are several examples of efficient oracles that play a pivotal role in the cryptocurrency landscape. The most renowned among them are Chainlink and Band Protocol. Both these oracles feed trustable and highly accurate price feed information to numerous DeFi (Decentralized Finance) protocols.
Risks Involved With Oracle Usage
Despite their usefulness, reliance on Oracles does carry specific caveats. Their chief risk is being a point of centralization within decentralized networks. These points of centralization can also become potential points of failure if the oracle fails to provide accurate and timely data or is subjected to malicious attacks. Hence, multiple oracles are often used to mitigate this risk.
