Last month, I provided a solution for Chainlink on how best to model implied volatility (IV) on-chain for both Bitcoin and Ethereum options using price feeds and oracles.
Chainlink — Decentralized Pricing Feeds For Etherum Smart Contracts
If you’re not super familiar with how Ethereum smart contracts work or The Oracle Problem, I’ll give a brief summary before diving into one of the major issues facing public blockchain protocols.
The Isolation Problem of Public Blockchain
Public blockchains are gaining popularity because of the their emphasis on both decentralized infrastructure and payment authorization. The premise is that decentralization provides fairness when it comes to data sharing, payments, and other industry applications which are typically offered as a service by a central authority — like Visa, Mastercard, Google, or Paypal.
While blockchains certainly offer a unique solution to the decentralization problem, they have unique issues surrounding off-chain data ingestion that can introduce security risks, fraudulent transaction, and just plain wrong application state that becomes immutable (non-removable) within the history of the blockchain ledger.
In other words, blockchains have a data problem.
So the question becomes:
How do you consume data from the real world, and how do you know it can be trusted so that transactions added to the ledger are both accurate and fair?
Data Problems Become Oracle Problems
To sum it up, the data problem with blockchains revolves around a very simple limitation — blockchains cannot pull in data from or push data out to any external system as a built-in functionality. As such, blockchains are isolated networks very