Why Decentralized Oracle Matters? Top 5 Decentralized Oracle Projects in Crypto

Table of Contents

Although there are many use cases for cryptocurrencies, none of them would be possible without decentralized oracles. If we think of each of our body organs as serving a certain purpose in our body, oracles would be the nerves that enable our organs to function cohesively. Similar to this, decentralized applications are vital components of the blockchain ecosystem that would perish if kept isolated indefinitely.

When Vitalik Buterin decided to establish Ethereum, he did so with the belief that Bitcoin suffers from a significant constraint since it cannot be scripted. Buterin and the team overlooked the reality that Ethereum has the same issue with constraints that Bitcoin does, despite the fact that the smart contract ecosystem did in fact build a dApp hub that everyone can make use of. The same interoperability problems that the IT sector used to have are still present in the blockchain industry today. There is a lot of space for poor user experience and general inefficiency because networks are unable to connect with one another. The situation is critical since blockchains cannot be directly integrated with legacy systems, which severely restricts their use and adoption rate. If we zoom out and examine how blockchains interact with the actual world, we see that this is the case. This restriction is referred to as the Oracle Problem. Digital ledgers stay isolated, much like a computer without an internet connection, without any means to transfer data or draw data from external systems that are not built on blockchains. The oracle problem is much more critical than anyone can realize, especially given that the majority of smart contract use cases depend on interfacing with the actual world.

Therefore, decentralized oracles were developed by blockchain developers to address this issue.

What are Decentralized Oracles?

We discovered that use cases for blockchain that rely on smart contracts, in particular, demand connectivity to the outside world. A blockchain-based smart city would need to integrate smart contracts and IoT data to control rental agreements, for instance, and the list goes on. Financial smart contracts would also need access to market data to calculate settlements.

In these situations, there is no connection between conventional IT infrastructure and blockchain technology. We require a middleware service—a piece of technology that bridges on-chain and off-chain systems—to fill the gap and link the two.

This piece of middleware is referred to as a blockchain oracle. Although complicated in design, oracles have only one function: to enable communication between blockchains and centralized systems.

Basic functions of Oracles

The following properties are the most crucial ones that all oracles must provide in order to establish a connection between on-chain and off-chain systems (with in mind that in some circumstances we also need oracles between blockchain networks themselves):

Listen: Oracles can keep an eye on blockchain networks using the function called "listen" and check for incoming user requests for off-chain data.
Extract: Oracles can extract data from external systems using this functionality.
Broadcast: Broadcast function is used to sign and share transactions on a blockchain to communicate information to a smart contract.

An oracle needs to simultaneously support both on-chain and off-chain systems in order to function. While one listens, forges connections, broadcasts data, and extracts information from networks, the other executes requests, gets data, and sends blockchain data to off-chain systems.

If oracles are so important for interoperability, why weren't they created years ago? As always, centralization is the cause of the issue.

Prior to 2017, the majority of oracles or oracle prototypes were centralized. It was exceedingly unreliable for networks like Ethereum to run these oracles since deterministic transactions—transactions that can be validated by all nodes—are the foundation of smart contracts.

If we were to utilize a centralized oracle, which is comparable to an enterprise database, blockchains would lose their decentralization the instant they interacted with an off-chain system.

Developers have been working on decentralized oracles instead because we do not want to destroy a basic blockchain function by introducing software with a completely different ethos.

The idea of such an oracle is to not rely on just one source. Instead, we increase the validity and quality of the data by building them so that they can aggregate data from several outside sources.

Why Decentralized Oracles Matters?

We can see the importance of decentralized oracles through several cases of money losses.

For example, a cascade of liquidations on the lending protocol Compound back to November 2020 is a nice illustration of the importance of having various sources of data.

Users of Compound can borrow and lend cryptocurrency. Collateral is required for borrowing, and the borrower's assets will be sold if insufficient collateral is offered. The price of DAI, a stablecoin that is frequently used for loans, unexpectedly rose by 30% on Coinbase Pro one day.

DAI Liquidations

At the time, Coinbase Pro was the only source of pricing used by Compound's price oracle. As a result, when the price increased, borrowers were left with undercollateralized loans, which were rapidly liquidated. On that particular day, the protocol had liquidations totaling $88.4 million. DeFi project dYdX also suffered as a result, although only sustained a loss of $8 million.

As we can see, due to a simple error, crypto investors lost a total of $96.4 million. The lending protocol would not have noticed DAI's brief price increase if Compound had employed a decentralized oracle that collected information from several sources and combined it.

Top 5 Decentralized Oracle Projects

Chainlink (LINK)

One of the earliest oracle networks, Chainlink, permits the use of off-chain data in smart contracts (Ethereum). Chainlink, one of the key companies in the data processing market in the blockchain and DeFi era, has a wide network of reliable partners. Many data providers can also monetize their information by selling Chainlink access to the data they have.

For instance, major DeFi applications like Synthetix, Aave, Compound, and others are using data from chainlink's decentralized oracles to make decisions.

In total, the Chainlink network currently has access to over 1 billion data points, protecting approximately $75 billion in value. All of this was accomplished by integrating 1,000 projects with 700 Oracle networks. Mainstream organizations are also becoming increasingly interested.

Good examples of companies that have cooperated with Chainlink for data verification include AccuWeather, FedEx, FlightStats, and the Associated Press.

Orocle

Orocle is the newly-emerged decentralized oracle being developed by Orochi Network. It functions as a bridge between decentralized applications (dApp) and reality. It feeds bias-free data into the communication between dApps and real-world. Being a system library of UnityOS (Orochi Computation Layer), Orocle can minimize the interactive latency between dApps and itself. Orocle can lower the latency to as low as 60~120 μs while the latency of the same task can be around 402~2200 ms if executed by a third party.

Orocle is the first introduced and offered to Layer-1 blockchains with an effort to find long-term partners that can collaborate together to create meaningful results in the future. With the assistance from Orochi in terms of technical integration, the Layer-1 projects can become successful case studies. There are also a few advanced values that Orocle offer to the industry:

Verifiable Data sampling: Whereas existing centralized oracles normally run a one-time data request and processing, Orocle executes verifiable sampling and processing. When the process completes, validators can provide an Argument of Knowledge or a Zero-Knowledge Proof to convince the verifier that the whole process is performed properly.
Verifiable Data submission: This is a combination of data with a SNARK submitted via a threshold signature to secure the submission process. It eliminates the need for third-party trust and protects the dApp from adversaries who want to sabotage the dApp’s state.

Our vision is to combine Orocle and Orocom (Orochi’s immutable ledger engine) to create the very first Verifiable Data Pipeline enforcing security with cryptography proofs (SNARKs). At the very end of our development, the result will be a Decentralized Data Lake for Web3, metaverse and dApp.

Band Protocol (BAND)

Band Protocol is Chainlink's main rival and the second-most valuable decentralized data oracle project. The BAND project is a cross-chain data oracle that organizes and feeds real-world data to smart contracts. It is compatible with many blockchains.

It makes it possible to deliver dependable feeds that are safe from tampering and have no single point of failure. This project has the support of businesses including the venture capital firm Sequoia Capital and the cryptocurrency exchange Binance.

Universal Market Access (UMA)

This is a new and exciting Oracle project that is primarily concerned with the DeFi space. DeFi is a new and quickly expanding segment of the cryptocurrency market with a $50 billion market cap.

The UMA project seeks to address the substantial hurdles and red tape in the conventional financial markets.

It's quite difficult for the smaller participants to join because the majority of financial and derivatives markets are regionally organized.

On the other hand, UMA contracts are built on the permissionless Ethereum blockchain, which enables anybody to build, manage, and trade digital derivatives. You can begin from any location in the world and simply need a crypto wallet to complete this.

API3 (API3)

API3 is a leading decentralized oracle project. In the conventional web context, we have a number of API providers who, largely without human intervention, transmit data to external systems.

This works perfectly, however they aren't actually accessible in the decentralized world of Ethereum. There is a project called API3 to address this.

The growth of blockchain technology necessitates access to data from supply chain and financial systems as well. There will be nodes available that may handle and profit from these data thanks to the decentralized oracles of the API3.

In particular, Airnode, a lightweight and reliable middleware node, has been developed to make API3 a reality. The unique features of this technology also include its ability to be implemented quickly, improving transparency and significantly lowering transaction costs in the process.

Final Words

Blockchains wouldn't be as useful without oracles. The current generation of decentralized networks resembles a computer or smartphone without an internet connection. We are unable to envision blockchain technology becoming useful to anyone outside of its current community given its extreme seclusion.

By offering a secure and trustworthy connectivity between on-chain and off-chain systems, decentralized oracles come to the rescue. They not only connect the old and new ledger systems, but also enable the connection to adhere to the fundamental principles of blockchain technology.

Oracles are more crucial than ever, especially considering that all DeFi projects are dependent on their use to gather pricing data, establish settlements, and enable investors to trade assets without using a traditional exchange.

Decentralized finance only became a reality when oracle providers reached maturity, which leads us to believe that DeFi wouldn't maintain its $75 billion valuation if it weren't for oracles.

About Orochi Network

Orochi Network is a cutting-edge zkOS (An operating system based on zero-knowledge proof) designed to tackle the challenges of computation limitation, data correctness, and data availability in the Web3 industry. With the well-rounded solutions for Web3 Applications, Orochi Network omits the current performance-related barriers and makes ways for more comprehensive dApps hence, becoming the backbone of Web3's infrastructure landscape.