The oracle problem and the future of DeFi

Chanelle Duley, Leonardo Gambacorta, Rodney Garratt and Priscilla Koo Wilkens

No 76, BIS Bulletins from Bank for International Settlements

Abstract: Crypto-based decentralised finance (DeFi) uses “oracles” to import real-world data into blockchain environments for use in smart contracts. Whether oracles can truly adhere to the complete decentralisation ethos of crypto is debatable. Even if feasible in practice, striving for the ideal of full decentralisation leads to complex consensus protocols that further erode blockchain efficiency. While introducing some degree of centralisation in oracles might boost efficiency, it also means adding trusted parties to a system designed to be trustless. As a result, crypto-based DeFi is likely to remain the preserve of cryptoassets only, rather than being used for real-world assets.

Pages: 9 pages
Date: 2023-09-07
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