Traditional Financial Data And The Blockchain Economy
Oleg is the CEO of dxFeed, a market data and financial services firm. Over 20 years of experience in information technology and finance.
Decentralization has become all the rage in recent years. It started with Bitcoin’s elegant distributed ledger. This spawned a myriad of clones but also some highly innovative rivals. Enter Ethereum a few years later, which allowed decentralized applications to be built on top of the base consensus mechanism.
Companies could theoretically build decentralized exchanges, lending protocols, prediction markets and much more. These would allow users to access many of the services of the traditional financial world but in an entirely permissionless way. However, my time as a financial data provider has shown me there are a few roadblocks in the way.
The Oracle Problem
Exuberant smart contract developers quickly ran up against an obstacle, also known as the oracle problem. They discovered that achieving decentralization in complex smart contracts was far more challenging than in a single-use case like bitcoin.
It’s due to a feature inherent to all blockchain systems. These systems are great for keeping track of all that takes place on-chain but are oblivious to the outside world. Their impressive security characteristics actually stem from this constraint. Essentially, any “if-then” logic, where “if” refers to something in the real world, becomes problematic. This, as you might imagine, is a far cry from the long-standing crypto vision of decentralizing all things.
There’s also a second part to the oracle problem. To overcome the issue outlined above, you could use an external data source, such as an API. The second part of the oracle problem states that your reliance on centralized data now undermines the decentralization of your smart contract. Centralized sources can be manipulated by bad actors within the organization itself, but they can also be compromised by man-in-the-middle attacks.
Enter Blockchain Oracles
Blockchain oracles have emerged to address the oracle problem. There are now third-party services that bridge the gap between the on-chain and off-chain worlds. They solve this oracle problem by decentralizing data from multiple sources so that no one source can ever be a single point of failure. This requires each source (or node) to cryptographically sign the data it provides, ensuring that feeds are tamper-proof while also allowing the user community to keep tabs on each node’s historical veracity. As with everything else in crypto, a set of rewards and penalties is there to incentivize the provision of consistently accurate data.
Creating Balance As A Data Provider
It’s been fascinating to observe the crypto phenomenon as it evolves. In a few short years, I’ve witnessed many of the institutions we service going from not knowing what crypto is to knowing but not caring, to requesting crypto price feeds from us and finally to commissioning bespoke analytic tools such as crypto-specific volatility indices based on options data.
For our part, we’ve gone from working exclusively in the sphere of centralized finance to touching the crypto world when our centralized clients request it of us, to recently launching our own Chainlink (a third-party blockchain oracle service) node as a way to plug our data directly into the crypto economy and all its possible uses in decentralized finance.
All this is to say that the narrative is constantly evolving for everyone involved. At the same time, the space is also cluttered with pieces of received wisdom that stubbornly refuse to be updated. One coin to rule them all, Satoshi Nakamoto’s proof-of-work concept as the only way to go and all forms of centralization being evil, these are but three examples of this intransigence, in my opinion. Any position that fails to acknowledge decentralization as a sliding scale, rather than an on/off switch, has to be missing the point.
If the oracle problem teaches us anything, it’s that it’s not about decentralization versus centralization. Rather, it’s about negotiating a balance between those two poles in search of a fairer, more inclusive and transparent way of doing things.
If “decentralization or death” is your slogan, then you’re stuck with a single crypto asset that can do nothing other than being scarce, secure and decentralized — an island on its own. Similarly, if the notion of decentralization is distasteful to you because it smacks of anarchy, then you’re stuck with opaque monolithic institutions that are plagued by cronyism and are rapidly losing the trust of the people.
What’s most exciting about this space, to me at least, is the synthesis of decentralized and centralized data of different technologies and blockchains working synergistically with one another. It’s these relationships that make all the exciting use cases like DeFi truly come alive. The ability to gain exposure to a market that has nothing to do with the protocol you’re using, without ever having to leave its safety, is just one simple yet earth-shattering example of this.
Perhaps this is clear to my company because we come from a data provision standpoint. For us, there’s good and bad data. What’s important is whether or not the source is authoritative. Assuming that it can be proven to be authoritative, then there’s a lot that can be done to make it less of a single point of failure.
Let us not forget that authority once led to trust, just as the betrayal of that trust has led to the growth of trustless technologies like crypto. It’s a simple yet perennial problem. In the real world, you often have to take someone else’s word about something you can’t immediately verify for yourself. If you can’t accept that, then you’re forced to verify absolutely everything, which leaves you no time for anything else.
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