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Trust Layer, Token, Oracle, How will Blockchain Change the World?
27 July 18:04

Author: Gate.io Researcher Edward. H

On January 3, 2009, in Helsinki, Finland, Satoshi Nakamoto mined the first block of the Bitcoin system, the Genesis Block, on a small server. In the log of the transaction, Satoshi also wrote down the headline of a front-page article in The Times that day: "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks". The quote, recorded in the Bitcoin transaction log, is immutable and ever-present, and is Satoshi’s sarcasm about the fragile banking system in the financial crisis.

Central banks' monetary overdraft inspired the birth of Bitcoin, creating a deflationary "digital gold", but the underlying technology of Bitcoin - blockchain - is much more than that. Blockchain technology is reinventing the concept of "trust" and is expected to bring a second revolution to the Internet.

BlockChain: The Trust Machine

Since the commercialization of the Internet in 1994, it has produced a huge amount of information. With the numbers 0 and 1, people have shaped a vivid "digital world" with text, music, video, and all forms. It was once thought that attention and trust could not be produced and therefore could not be called a commodity. But with the development of new technologies such as social media, big data, and recommendation systems, the Internet has generated an overabundance of information, giving rise to the so-called Attention Economy, which has turned attention into a commodity.

But the Internet itself can't handle the trust issue. Any document itself is a string of code that can be copied and altered. How can we make sure that a particular proof document has never been tampered with? How do we trust some stranger in a faraway land? In order to establish trust on the Internet, it is often necessary to rely on centralized organizations. But is this organization itself necessarily reliable? In addition, the existence of a trust center brings about complex transaction processes. In this case, it is difficult to build trust directly between people.

Blockchain technology is a timely solution to this problem. Blockchain does not rely on any centralized third-party intermediary (i.e. peer-to-peer transactions, P2P), but rather creates trust through cryptographic principles and code. In a blockchain network, each node holds the same complete ledger, and no single node can control the entire network. In addition, each node needs to contribute arithmetic power, pack the most recent transactions added to the main chain and broadcast them to the public, so as to maintain the operation of the system, which makes it difficult for attackers to tamper with the data on the chain.

In 2015, The Economist magazine published a feature article calling blockchain technology "The Trust Machine". Blockchain allows people who do not know each other to collaborate reliably and at a lower cost. Whereas people used to rely on credit intermediaries to collaborate on the Internet, today the blockchain network itself is the intermediary, or the blockchain creates trust.

Image Source: The Economist

How do Token Represent Value, Assets?

As mentioned earlier, what flows on the Internet is information. Since information can be copied perfectly, this conflicts with the uniqueness of "value". In the real world, there is certainly no need to rely on an intermediary to hand over a piece of cash to someone. But in the digital world, it is not so easy. Since digital information can be copied perfectly, how can we avoid copying a sum of money and spending both at the same time if there is no centralized database like Alipay to keep track of it? This is the so-called double spending problem.

Because blockchain systems such as Bitcoin solve the double-spending problem by enabling trust among network members through decentralization and consensus mechanisms, it is also possible to represent value in the digital world using some sort of data structure. This process is actually similar to centralized networks such as Alipay. While Alipay uses a centralized ledger stored on Alibaba's servers, the Bitcoin system uses a so-called "distributed ledger". Bitcoin is actually the balance recorded on this "distributed ledger" (i.e., UXTO, Unspent transaction output). And because each transaction is written on the chain and recorded on each node, this makes the process of transferring value in the digital world reliable and traceable. Things like Bitcoin, which are used to represent value on the blockchain, are called "tokens", which stand for "negotiable cryptographic digital proofs of interest".

Bitcoin is unique because it is "created out of thin air" and has no counterpart in the physical or digital world. Bitcoin’s value is created in transactions. Only if enough people accept Bitcoin and trust its prospects will Bitcoin have so-called "intrinsic value". Technically, we could argue that Bitcoin is just a mathematical toy that solves the problem of how to represent value in a decentralized way in the digital world.

Another advancement in blockchain technology is Ethereum. In terms of representation and transfer of value, Ethereum has borrowed from Bitcoin's distributed ledger design. Its technical innovation lies in the Turing-complete smart contract, which makes the issuance of tokens extremely easy under the ERC-20 standard. Furthermore, the smart contract makes it possible for tokens to represent various assets on or off the chain, digitally or in reality. And based on smart contracts, blockchain technology goes further after realizing peer-to-peer transactions, making decentralized transactions between various digital assets possible, such as Uniswap, the largest decentralized exchange built on Ethereum.

For those assets that are not on the chain, they generally need to be linked to the chain through an oracle, then they can be traded through a smart contract. The oracle is an essential complement to the smart contract.

How Oracles Bridge the Gap Between On-chain and Off-chain
The blockchain itself is a closed data structure. The off-chain information in the real world or other digital worlds will not be spontaneously generated on the blockchain, and smart contracts can only passively accept data and process it. Oracles are applications that submit information to the blockchain from the outside, and are the interface between the blockchain and the real world.
Blockchain for Novices series: what are Oracles? | by AQOOM | Medium

Image Source: Medium

A smart contract is like a vending machine. As long as you put coins into it, you’ll get snacks or drinks from it. A blockchain-based online shopping process should be like this: the buyer transfers money to the contract account, which represents the purchase order, and the buyer’s account will be temporarily locked in the smart contract. When the buyer confirms the delivery, this information will be transmitted to the blockchain through an oracle, and the smart contract will automatically transfer the payment to the merchant, thus the entire transaction is completed.

Since the data transmitted by the oracle determines the input of the smart contract, the oracle also indirectly determines the output of the smart contract. If someone controls the oracle and gives the wrong input, the output of the smart contract can be controlled to a certain extent ( Oracle attack). Writing information into the blockchain can only ensure that the information is not tampered with, and errors from the data source cannot be avoided. This so-called "oracle problem" also brings challenges to the security of the entire smart contract.

For the oracle, it is necessary to collect as much data from the real world as possible, and ensure the correctness of the data. Therefore, oracles often implement certain incentive mechanisms. Let's take Chainlink, the largest decentralized oracle machine on Ethereum, as an example. Chainlink launched its own token, Link. Data providers need to pledge Link. Those who provide correct data will be rewarded, while providing incorrect data will be punished. At the same time, Chainlink will compare and aggregate data collected from multiple nodes, then transmit the aggregated security data to the smart contract.

At present, the main scenario for the oracle is DeFi, in which the design of stablecoins and decentralized financial derivatives all rely on the use of oracles. In addition, the oracle is also an important middleware for issuing asset-back-token, which means that real-world assets, such as house deeds, creditor's rights, etc., are authorized to be registered on the blockchain. In DeFi, this means the process of collateralizing digital assets to generate synthetic assets. The price of synthetic assets often needs to be anchored with the price of real or digital assets used for collateral.

What is Stablecoin?
Bitcoins are issued via mining, enabling complete decentralization. Bitcoin has a vision of becoming the world's currency, but because of its high price volatility, it is currently seen as a speculative asset only. In contrast, if you want to realize payment via cryptocurrencies or find a common underlying value for all assets in the crypto market, you need to turn to a more stable value. In this case, stablecoin was born, which gives a direct and comparable digital value to various digital assets, making it easier to exchange between various digital assets in DeFi.

Currently, stablecoins can be divided into three categories in terms of principle: Off-Chain-Backed Stablecoin, On-Chain-Backed Stablecoin, and Algorithmic Stablecoin. Both fiat-collateralized and digital asset-backed stablecoins are anchored to an asset and maintain the same value as it. Fiat-backed stablecoins are generally issued and managed by a centralized organization, such as USDT and USDC, which are currently the two largest stablecoins.

As an example, USDT, known as Tether USD, is a crypto currency issued by Tether in 2014 that is equivalent to the U.S. dollar. USDT was first issued based on the Bitcoin network's Omni protocol, and later gradually moved to Ethereum’s ERC-20 protocol. However, due to the high transaction fees of Bitcoin and the Ether network, USDT is now issued more based on the Tron network's TRC-20 protocol. Currently, there are no fees for users to deposit or withdraw funds from TRON-based TRC20 addresses on Gate.io.

Click here to learn more:
Gate.io Added a 20,000 USDT Time-Limited Bonus to the Stablecoin Liquidity Pools of USDC and TUSD on the Tron Blockchain
USDT deposit address:
USDT withdraw address:

On Ethereum, we can still see the smart contract code for Tether to issue USDT, just over four hundred lines of code that sends USDT to an official address (known as Tether Treasure) each time it executes a mint, after which Tether distributes or sells them. The firm mentions in the USDT white paper that there is a 100% USD reserve behind the USDT. So the company adds one USD to the reserve for every USDT it issues on the chain. However, there is still a lot of controversy about whether Tether has the full amount of reserves as it claims, with many accusing it of being an "unsecured cash printing machine".

Another stablecoin model, the digital asset collateral model, is to issue a digital currency with an anchored fiat price by pledging digital assets on a smart contract. This model is represented by the DAI issued by Maker, in which a user pledges excess digital assets (such as Ether) in a smart contract, creating a separate so-called "collateralized debt position" (Vault) for the user, after which Maker will mint a corresponding amount of DAI based on the dollar valuation of the assets. The role of the smart contract is to automatically adjust the interest rate and prompt the borrower to pledge or redeem the digital assets, thus changing the supply of DAI and regulating the price. Therefore, the digital asset collateral model of a stable coin is a "decentralized stable coin".

Algorithmic stable coins are special in the sense that they are not backed by any value, but rather by an algorithm that regulates supply and demand to keep their prices stable, which is somewhat similar to that of a real-world central bank. A typical example of this model is AMPL, an algorithmic stablecoin that controls the supply of stablecoins through open market operations, rebasing, issuing secondary tokens, etc.

Algorithmic stablecoins are a major innovation in DeFi, but because of the difficulty of designing protocols for algorithmic stablecoins, their prices currently deviate significantly from the anchor price from time to time.

In addition, Gate.io has also launched liquidity mining for DAI, USDC, TUSD, USDT and other stablecoins, making it convenient for users to exchange between various stablecoins and providing high returns to liquidity providers.

In the future, with the improvement of blockchain performance, the influence of blockchain on the Internet will go deep into the protocol level, and blockchain will bring trust layer and value layer to the Internet. People may not even be aware of the existence of blockchain, but the application of blockchain will profoundly change the mechanism of the Internet.

Smart contracts, DeFi, stablecoins, the birth of various innovative technologies, also herald the huge impact that blockchain will bring to our lives. Gate.io will be here to witness with you.

Author: Gate.io Researcher Edward. H
* The article only represents the researcher’s views and does not constitute any investment advice.
* Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all other cases, legal action will be taken due to copyright infringement.
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