Oracles play an important role in the crypto world nowadays as it solves the problem of connecting blockchain to the external data source.
See more: Blockchain oracle projects
With the rapid and continued expansion of the blockchain systems, there are more and more types of oracles projects created with all different functions or characteristics. For this reason, an overview of top oracles projects in the recent market will be included in the comparative analysis today for readers’ reference.The listing can be found as below:
- Chainlink (LINK).
- Band Protocol (BAND).
- Teller (TRB).
- Decentralized Information Asset (DIA)
What is Blockchain Oracle?
Oracles act as a data source that can be fed into the blockchain, enabling them to access real-time information about assets. Blockchain Oracles themselves are not the data sources but the layers that verify on-chain information of real-world events, and then submit the accumulated data in blockchains through smart contracts for verification purposes.
The data transmitted by oracles comes in many forms – price information, the successful completion of payments, and temperature measurements. However, the data has to be relevant from the outside world to execute the contractual agreements.
Why does Blockchain need Oracles?
The blockchain’s problems
The blockchain network operates by each node maintaining a copy of the ledger so that when two nodes try to validate transactions against one another they can get back consistent results.Smart contracts are self-executing digital contracts that work on a decentralized network such as blockchain and can be used to automate all kinds of transactions. Smart contracts remove the involvement of third parties in the blockchain technology and make it become more transparent and decentralized.
However, blockchains and smart contracts themselves don’t have access to on-chain information, as known as off-chain data. Without blockchain oracles, smart contracts would be limited in their capabilities. They could only rely on information that is already within the network and not have access to any more outside data sources which could jeopardize security for users and applications.
The oracle solution
Oracles provide a way to bridge the gap between data sets from outside sources and what’s on-chain. This is important because smart contracts would otherwise be limited in their ability to operate if they only have access within one network, like Ethereum or Bitcoin for example.
They act like an API that allows smart contracts to interface and make decisions based on real-world events, such as changes in price, transaction payments and other real-world events.This is an example of why we need real-world data:
This project allows users to bet their cryptocurrencies based on real-world events, which is a game in the National Football League in this case. The application needs a data source in order to operate correctly.If the data is incorrect, every user who bet on this result would receive incorrect results, therefore, will lose or win money based on that incorrect data.Oracles played a vital role in this bet. They were able to settle it with data that could not be gamed by any participants, thus preventing them from being cheated out of their winnings.Therefore, we can see that oracles provide solutions for these issues in the blockchain networks:
- Allow blockchains to access data from the outside world.
- Verify data and transmit validated data to smart contracts to prevent manipulation in the market.
Types and applications of blockchain oracles
Blockchain oracles can be classified depending on the quality they offer to a network. A project can be classified into multiple categories, and there are many categories such as:
- Source: Does the data originate from software or hardware?
- The direction of information:Is it internal or external?
- Trust: Is it centralized or decentralized?
In this article, we will focus on Internal and External oracle projects as they are the most popular ones in the market.
- External Oracles: Are the oracle service providers for multiple blockchains or applications that require data from the outside world or other applications.
For example: Chainlink is a third-party service oracle provider that provides smart contracts with external information.
- Internal Oracles: Are the projects that only provide services for their own project, such as Augur, a project that has an oracle built inside it to provide data for their own needs.
The applications of blockchain oracles vary based on what they will be used for. There are many potential uses, but some common ones include:
- Price feed: Oracle service providers allow DeFi applications to access real-time prices from other platforms to serve their own functions such as Lending, Borrowing or Synthetic Assets.
- Data delivery: Provide data for blockchains or applications. This includes exchange rates for cryptocurrencies and other key datasets in finance as well as stocks, indices or fiat currencies that are traded on exchanges around the world
The importance of Blockchain Oracle to DeFi
Oracles are essential to the DeFi ecosystem, where most operations rely on real-world data for smart contract execution. As a result of this reliance and need for oracle services in Centralized Finance (CeFi), many fundamental infrastructures have been built around its technical querying process which allows databases to exchange price feeds seamlessly with little issue or delay between them.In just over a year, we have seen a massive increase in DeFi and it has become one of the hottest trends in the cryptocurrency world. The Total Value Locked (TVL) increased from $23B to $84.71B in just over 9 months.
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Rapidly growing and gaining massive adoption in total value, DeFi projects are heavily reliant on oracles because of the ability to supply accurate real-time information. The rise of blockchain oracles has helped to enhance data reliability and accuracy for various DeFi protocols and applications.As mentioned above, one of the most important use cases of Oracle projects is price feed. Most of the functions on DeFi require accurate data to operate smoothly and correctly. Derivatives protocols, lending protocols or yield aggregators are the most popular ones which require updating high frequency in order to run their services. For example, a derivatives trading platform such as dYdX uses price feeds to keep track of trader’s collateral ratio on various assets.However, the surge of DeFi also has its shortcomings which are related to oracles. If the oracle is compromised, the smart contract which relies on it will also be compromised, therefore the trust conflict between the oracle and the execution of the smart contract remains an unsolved issue. As evidenced, the market has witnessed numerous hacks and exploits that led to significant loss of the projects and users as well.One of the examples is $100M liquidated on Compound platform due to oracle exploited on DAI stablecoin. On this platform, participants are allowed to borrow funds from other users. However, the exploit forced users to provide collateral that exceeds the borrowed amount which caused the over-collateralized effect.
With the information provided above, surely everyone has gained a brief understanding of oracles and its importance. In this section, we will dive deeper into some of the prominent oracle projects to evaluate the projects’ operating model, effectiveness, and other criteria.
Chainlink is a decentralized oracle network that provides reliable real-world data for smart contracts across countless blockchains and applications in the cryptocurrency world. The network allows smart contracts to receive accurate data from external sources such as any kind of API or external data feeds.
As a third-party oracle provider, Chainlink is powered by node operating systems. Basically, anyone who participates in the network can run an oracle including API providers, developers or individuals.Users can just connect their API to become a Node Operator in the network. Every oracle is also given an on-chain identity and credentials which can improve its reliable performance. This makes the network available for everyone and prevents bad data while maintaining the decentralized architecture.Chainlink’s three-step execution process helps the network create more efficient use of its resources by using external data sources to facilitate communication with users.
The LINK token is designed to support the working architecture of the project. LINK is used to pay node operators that retrieve data or as a deposit required by smart contracts developers. The network also determines the reputation of an oracle based on the amount it holds.Chainlink is the most prominent project in the oracle field. They are considered to be industry standard, and with their success almost irreplaceable. Many projects have been choosing Chainlink as their oracle provider at this moment, some names which can be mentioned include Aave, Cardano, Origin Protocol….The number of Chainlink partners is not only limited to the DeFi market, Chainlink is also chosen by other major platforms as partners such as Coinecko, Binance and Huobi.
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Band Protocol (BAND)
Band Protocol is an incentivized network that uses blockchain and rewards users for their real-world data. The protocol was designed to provide the decentralized applications (dApp) running on blockchains, with accurate data in order to function simultaneously.The project acts as a bridge between the external data sources and blockchains. The working model is pretty similar to Chainlink where a Data Provider will provide data to node operators, then customers will be able to receive these requests.The main difference between Band Protocol and Chainlink is that Band is a blockchain while Chainlink is a third-party provider. Originally built on the Ethereum network, Band Protocol switched to new advanced Cosmos technology to use the Cosmos DSK to replay data across other blockchains.
The BAND token has more use cases than its competitor LINK, such as:
- Collateral/Stake for Validators.
- Medium of Exchange.
- Governance in BandChain.
It can be seen that the band used blockchain technology instead of becoming a third-party provider like Chainlink. This may improve Band’s scalability better, but instead, the project will need to trade off a few factors such as smoothness when using the service or higher latency compared to Chainlink. Can this trade-off help Band catch up to Chainlink in this race?
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Tellor is a decentralized oracle that allows parties to request values of off-chain data points, such as BTC/USD. Miners then compete in order to add this value to on-chain data sources and these data sources can be accessed by all Ethereum smart contracts.The unique point of the project is data will be mined by miners in order to provide off-chain data for its customers. Miners will be competing to submit data on-chain and earn rewards if the data is accurate.
Using a traditional Proof-of-Work (PoW) algorithm, Tellor aims towards maximum decentralization and security. There is no private or public sale for TRB tokens, instead all TRB is mined by miners.Tellor’s native token is used for payments, reward or disputing within the project’s ecosystem. However, due to the difficulty in scalability and development of the project. Tellor has released a version of TellorX and is in the process of an audit.TellorX will use Proof-of-Stake (PoS) algorithm instead of Proof-of-Work (PoW). In addition, TellorX will also be integrated with cross-chain capabilities and submit data in bytes, making data submission more flexible and robust. If the external audit is successful, TellorX will launch in Q4 2021.
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DIA is a blockchain-based oracle platform that connects data providers with consumers, and enables trustable information sharing among market actors.
The working architecture of DIA is summarized as below:The usability of DIA can be said to be more than that of other oracle tokens such as TRB. Some of the use cases can be listed as follows:
- Vote on governance issues.
- Funding for data collection.
- Authenticate data through zoning.
- Encourage platform development.
- Access live data streams and specific APIs.
In general, the difference and highlight of the DIA platform is that it gives users the ability to provide and validate data sources instead of collecting data themselves like other projects such as Chainlink or Band Protocol. This will make the data more transparent and accurate. However, in order to have more sources of information and higher accuracy data, the project must build a large number of users for the network to work effectively.
If Chainlink is considered as nodes between API providers and smart contracts, then API3 offers a solution to provide decentralized APIs to their customers. The project aims to become a first-party oracle with open and direct governance by using API3 token and API3 DAO.
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The project is powered by airnodes, the off-chain system that can feed data to aggregators using the Ethereum nodes. The aggregator contracts include decentralized APIs which are callable from other contracts. In short, it is an oracle node that is operated by API providers.API3 can eliminate the use of middlemen by leveraging the secure and cost-efficient capabilities of dAPIs. Customers who are using dAPIs can be more confident when getting direct data from API providers instead of using a third-party like Chainlink.However, decentralized APIs are relatively new in the industry. Therefore, API providers might face challenges such as unfamiliarity with the new architectures and systems when they need to transfer the operation of dAPIs to oracle nodes.The API3 token is governed by a decentralized autonomous organization (DAO). Every participant will have the right to determine the development and security of the network. The token can be used for:
DAO is becoming a must-to-go requirement for blockchain projects these days. API3 can have advantages when the project’s architecture is towards the benefit of the community and maximum decentralization in the use of dAPIs and DAOs. But can these factors make API3 one of the top oracle providers? We will analyze it in more detail in the next section.
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The comparative is based on key criteria
In this part, I won’t dive deep into the technical details. Instead, I will outline the basic information that people can find on each project. From there we can see the difference as well as the advantages and disadvantages of each project.
Despite their critical position in DeFi, Oracles’ market capitalization is now rather minor in comparison to the phenomenal growth of DeFi in the recent past.
With only $12.41b in total market capitalization for all projects and only Chainlink stays in the top 100, the potential for oracles to grow is significant considering the total market size of DeFi is $128.18b.
If DeFi continues to expand at its current growth rate, the purpose for using the Oracle platform services will also increase.Chainlink has been the leading project in its category for some time now. With their advantage of being able to maintain popularity thanks to strong support from the community, there’s no other crypto with an upper hand when it comes down to projects at this moment in terms of capitalization and recognition.There are opportunities for investors as Chainlink’s capitalization is currently high. However, there will also be risks in investing in low-cap projects such as API3 or Tellor, that have less market dominance or popularity than other companies’ products do at the moment.These are just very basic information and investors must do their research carefully before making their investment decisions because evaluating a project by capitalization and basic information is not enough.
Number of partners
In general, Oracle is critical infrastructure, making it difficult for a retail investor to evaluate the project’s potential.Unlike when using AMM, DEX, or lending platforms, we can examine when using directly while also considering other variables. Oracle’s accessibility and user permissions are quite limited, as the necessity to use Oracle is mostly for projects.However, one signal that I believe is quite essential when analyzing oracles is the number of partners they have. Because if an Oracle project is good and reliable, it must be trusted and used by more than other projects.Therefore, let’s refer to the number of partners of each project through the following figures:
Based on this data, we can conclude that Chainlink is still the most popular project in the Oracle array, with approximately 500 projects using it (Up nearly 100 percent since September 2020).Band Protocol comes close behind, with a somewhat quick development rate despite the fact that Band is a relatively new project. However, while Band is considered a competitor of Chainlink, this figure remains fairly tiny.Furthermore, other projects are not as prominent in terms of client volume because, for an Oracle project, if they have a market reputation, their network effect will be highly valued.The risk of projects relying on an oracle that hasn’t been finished and is trusted by many other projects is likewise high. When there are hacks or exploits that affect Oracle and do major damage to DeFi projects, you can refer to my example in the preceding section.
As previously said, because Oracle is a critical infrastructure, evaluating insights such as the architecture or data quality of a project is quite challenging.However, I will continue to list the fundamental aspects of Oracle here so that we can refer to the differences in each example.
As can be noticed, the projects listed above have more features than Chainlink. Typically, Band Protocol has several unique advantages, such as being both a blockchain-oracle and developing with the Cosmos SDK rather than a thirty-party like Chainlink.However, why is Chainlink still the most popular project, and why is their service trusted?The major objective of an oracle, in my opinion, is to give smooth and precise data for DeFi devices. Is it really important for a DeFi project to worry about Oracle’s remarkable features as a blockchain-based or third-party when all they require is a reliable data feed and price feed?Perhaps features geared towards a decentralized platform, such as Tellor or Band, will be employed more in the future, as Oracle projects are still extremely appealing and require development work. However, in this Oracle array, network effects, reputation, and efficiency are still more essential than scalability.
Should we invest in Oracle projects?
With the information I’ve provided above, I hope you’ve gained a better understanding of Oracle’s projects. It will take time to examine and monitor a project before making a choice to invest in it. The information I provide is not intended to be investment advice.However, I will highlight certain key points from the article as follows:
- Oracle is a significant array of critical infrastructure. However, analyzing Oracle is challenging for a retail investor because Oracle’s customers are projects rather than users. As a result, before investing in Oracle projects, we must conduct an extensive study.
- DeFi has expanded rapidly and will continue to expand in the near future. The demand for Oracle will rise at the same time. However, in order to invest in Oracle, we must have a long-term perspective, as opposed to platforms such as AMM and DEX, where the project can expand extremely quickly in a short period of time.
- When analyzing an Oracle project, we should keep an eye on the network effect and the number of Oracle clients. Furthermore, if we choose Oracle as an investment portfolio, we must have a long-term perspective. However, when compared to systems such as Lending & Borrowing or AMM, DEX, the related risk may be lower.
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