Oracles
Note: Data in this section last updated September 12th, 2022
What are Oracles?
Blockchains have one major limitation – they are unable to access data from external systems. This is by design, like a computer without an internet connection, they maintain their isolation to guarantee security and streamline efficiency.
Unfortunately, the vast majority of potential use cases for smart contracts require a connection to the outside world. Exchanges need accurate price information, insurance needs data to make decisions on policy payouts and many apps require market information to determine settlements.
The solution to this problem is known as an oracle, a separate piece of infrastructure that bridges a blockchain to real-world data. Oracles can source a variety of information including, price reports, weather, sporting scores, results of elections, geodata, random numbers, etc…
Oracles became very popular in 2020 and were among the best performing assets in crypto that year.
Oracles Some of the Best Performing Assets in 2020
The main challenge with designing oracles, however, is that if any oracle is compromised, the entire system is compromised. As such, we need to leverage a decentralized oracle network to guarantee security.
How do Oracles Work?
To understand how oracles function, let’s take a look at Chainlink, a decentralized blockchain oracle network built on Ethereum.
The project was founded by Sergey Nazarov in 2014 and launched an ICO in 2017 to raise $32M. The project has a very strong management team and recently onboarded Eric Schmidt as an advisor.
Oracles Allow Blockchains to Access External Data
As a decentralized oracle network, Chainlink relies on hundreds of independent oracles to provide relevant data.
As an example, let’s say that Sushiswap wants to show the price of Ethereum on its site. They would:
Create a request for data from the Chainlink network to obtain the price of ETH.
Submit this request along with payment in the form of Chainlink’s native token, LINK.
Chainlink will then automatically select the best oracles based on 1) their reputation and 2) their ability to find the necessary data
Oracles will find the requested data (e.g. the price of ETH) and send it back to Chainlink. Oracles must stake LINK tokens as collateral to ensure proper behavior
Chainlink will aggregate the results, choose the most accurate answers and discards outliers. Oracles that are deemed to be negligent and / or malicious may face penalties and lose some or all of their collateral
The information is routed through Chainlink to the Sushiswap.
Sushiswap can then populate their site with the current price of ETH.
Chainlink has achieved strong traction since launching and currently dominates the oracle space with nearly 1,500 partners. For comparison, the next largest network has fewer than 200.
Who are the Key Players in the Oracle Market?
Chainlink dominates the oracles space with 68% market share.
Other notable players include Berry and Band Protocol.
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