Oracle Problems and Solutions — Outlier Ventures (Part 2 )
The practice of storing digital #RWA, also known as the tokenization of Real World Assets on the blockchain, is set to revolutionize how we interact with physical assets. #DeFi is already exploring this concept, and we believe that tokenizing Real World Assets will impact every industry as blockchain infrastructure becomes more widespread over the next decade. Tokenization is creating a digital twin of a real-world asset in the form of a digital token or NFTs on the blockchain. The blockchain database is populated with digital copies of RWAs during the tokenization process.
Oracle Problem
The problem with blockchain oracles is that it is difficult to securely and accurately bring external data into a blockchain’s isolated environment. This challenge is related to the difficulty of updating Real World Assets data onto the blockchain trustless.
- Liquidity Splintering: Lack of standardization in tokenization practices and marketplaces creates fragmentation, making trading assets difficult and expensive across multiple venues.
- Network Effect: Blockchain-based applications like #RWA rely on network effects to improve efficiency and liquidity. Tokenizing #RWAs requires leveraging network effects to create a viable value proposition, attracting new users and reducing the cost of operating a decentralized database.
- Tokenization Standards: Tokenization is making blockchain finance more regulatory compliant and compatible despite its decentralized nature.
- Infrastructure: The transition to a blockchain-based data infrastructure requires a significant overhaul of digital asset copies to ensure daily operations.
The blockchain oracle problem refers to the challenge of securely and accurately bringing external data into a blockchain’s isolated environment. This problem is related to the issue of updating data about real-world assets onto the blockchain correctly and trustlessly. Although blockchain networks are designed to be decentralized and trustless, there are scenarios where blockchain applications need access to external data such as stock prices, weather data, carbon footprint index, or sporting event outcomes. The main challenge is making sure that changes in the features of real-world assets are accurately reflected in the digital twin (token) even after being minted.
‘The oracle problem becomes a lot less intractable when you consider where the data to oracles actually comes from and count the data provider into the equation. That is, by defining the oracle ‘as a piece of middleware that transports data from source to blockchain,’ you demystify the topic significantly and can use a first-principles approach to providing a solution.’ — by Andrew Singer
Solutions to the Oracle Problem
Innovation & Game Theory: We have observed that innovative solutions with embedded game theory can align incentives among stakeholders and encourage the accurate and up-to-date tokenization of real-world assets (#RWAs). Game theory and innovation are crucial in ensuring that tokenized real-world assets accurately mirror their real-world counterparts on the blockchain. These innovations incorporate incentive-driven smart contracts, reliable governance systems, secure oracles, and interoperable protocols to promote transparency and trust. As a result, these innovations prevent discrepancies in asset representations.
Digitalization: Over time, tangible assets are increasingly represented as intangible assets because intangible digital assets are easier to evaluate.
Tokenization Standards: Efficient verification, transfer, and governance of tokenized assets are ensured by standardizing tokenization protocols to represent real-world counterparts within the blockchain ecosystem.
Proof of Reserve (PoR): Game theory offers cryptographic proof through structures and mechanisms that ensure the issuer of tokens maintains accurate reserves.
Oracles with Incentives: Tokenized tokens backing tokenized assets incentivize accurate data through oracles staking tokens as collateral and facing penalties for incorrect data.
Decentralized Governance DAO: A decentralized autonomous organization (DAO) and governance system ensures transparency and collective decision-making for a digital currency.
Interoperability and Cross-Chain Solutions: Tokenized assets integrate with blockchain networks via interoperability and cross-chain solutions, ensuring their integrity across diverse networks.
Community and Ecosystem Incentives: Tokenized assets are digital currency that can be monetized through gamified rewards and governance structures, ensuring accountability and transparency.
Conclusion
Modern technology, especially blockchain, has brought a revolutionary change in tokenization and will continue to do so. In the 16th century, local merchants and municipalities used to create tokens from materials like copper, lead, and tin to simplify trade and reduce risks associated with precious assets. Nowadays, tokens represent tangible and intangible assets on decentralized ledgers, offering benefits their historical counterparts couldn’t provide. As we connect the traditional concept of tokens with blockchain capabilities, we observe a transformative shift across various global industries, streamlining operations and challenging notions of asset ownership and exchange in the digital age.
About Phyken Network
RWA tokenization and fractionalization protocol focused on bringing green and renewable energy assets on-chain.
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Written by: https://medium.com/@rjkesavchandar
