Oracle
A service that feeds real-world data (like asset prices) to blockchain smart contracts, which can't access external information on their own.
Blockchains are isolated systems. A smart contract on Ethereum has no way to know the current price of ETH, the weather, or any other real-world data. Oracles bridge this gap by fetching external data and delivering it on-chain.
In DeFi, oracles are critical for lending protocols. When you borrow against ETH collateral, the protocol needs to know ETH's price to determine if your position is safe or should be liquidated. Chainlink is the most widely used oracle provider.
Oracle failures or manipulation can cause serious problems. If an oracle reports a wrong price, loans could be incorrectly liquidated or attackers could exploit the mispricing. This is one of the risks in DeFi that doesn't exist in traditional finance.
Related Terms
Smart Contract
Self-executing code deployed on a blockchain that automatically enforces the terms of an agreement.
DeFi (Decentralized Finance)
Financial services built on blockchain smart contracts that operate without traditional intermediaries like banks.
Liquidation
The forced sale of collateral when a borrower's collateral value drops below the required minimum ratio.
Lending Protocol
A DeFi application that lets users lend crypto to earn interest and borrow crypto against collateral.
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This definition is provided for educational purposes. USDC.org is an independent resource and is not affiliated with Circle Internet Financial.