Blockchains are low-resolution

Blockchains are fantastic asset ledgers. They record ownership and settlement between counter-parties without the need for trusted intermediaries. 

However, blockchains have a massive limitation. Blockchains only understand information about their own state. They can't read any information or data from outside the blockchain.

Take for example the price of an asset. The Ethereum protocol can easily recognize which EOA’s control which tokens, however there is no on-chain price information without some type of oracle that can attest to the price at a given time.

Introducing the oracle problem

In order for self-executing financial agreements (called smart contracts) to operate, they need to be able to trust a data source that instructs them about off-chain information. I.e. the Aave smart contract can't liquidate your collateral without being able to verify that your liquidation threshold has been met. And without oracles communicating the price of your assets in real-time, this would be impossible.

This is called the “oracle problem”, and it’s been solved by creating trust-minimized oracle networks which take off-chain data and put it into blockchain and smart contract readable format. 

The undisputed leader in this category is Chainlink.

Known for creating the price-feed oracles that kicked off DeFi summer in 2020, Chainlink oracles are vital for the self-executing financial contracts that make DeFi possible.

Real-World Asset tokenization will require trusted oracle networks. Investors can transact with tokens representing claims on off-chain assets only if they are able to verify off-chain data.

In the same way that Chainlink kicked of DeFi summer by bringing off-chain data to smart contracts, Chainlink will jumpstart the tokenization of real-world assets.