Which Blockchain Oracle Is Best For Your dApp?
Blockchain networks are deterministic systems that rely on cryptographic functionalities to process transactions and verify all of the information within them. But the very nature of blockchains makes them somewhat limited, in that they’re only able to provide very limited data – namely the information they process – which means they can only support some very basic use cases.
This is where blockchain data oracles come into play, enabling decentralized networks to leverage off-chain data that can be used to build far more capable decentralized applications or dApps.
Oracles are what allow smart contracts built on the blockchain to interact with the real world. They play a crucial role because blockchains by themselves cannot access any external data. Without them, the Web3 industry will never be able to realize its vision of replacing the existing, centralized web.
With data oracles, dApps become more applicable in a variety of use cases, such as finance, supply chains, sports betting, weather forecasting, insurance and more. Their importance is due to their ability to access real-world data in a way that’s automated, trustless and decentralized, in-line with the basic principles of blockchain.
For dApp builders, choosing the right blockchain data oracle is a key consideration that inevitably means making trade-offs in terms of performance, centralization, security and more.
Risks Of Using Blockchain Oracles
There have been incidents in the past where attackers have successfully manipulated blockchain oracles to create arbitrage opportunities that enable them to make significant profits through trades. One of the most widespread risks is the re-entrancy attack, which abuses the callback functionality of smart contracts. They call the same method repeatedly before the caller smart contract updates its balance, leading to the possibility of multiple payouts. These attacks can be used to increase the gas fees for some users when issuing a request.
In addition, manipulation attacks attempt to create arbitrage opportunities. For instance, an attacker might utilize a flash loan to buy enormous amounts of one token in a token pair, creating a big decrease in the value of the second token, which can then be bought at a cheaper price and sold for profit on a different platform.
Key Criteria For Selecting A Blockchain Oracle
When it comes to choosing a blockchain oracle to rely on, dApp developers will need to consider a few things in order to ascertain the reliability and reputation of each offering. No doubt, they’ll ultimately want to make some kind of trade-off in terms of price, performance and security.
One of the most important considerations is data accuracy. How accurate and reliable is the data provided by the oracle? What is the risk of it delivering erroneous information? What disincentives are employed to try and prevent this?
Developers will also want to consider the performance of their chosen oracle, especially in terms of how often its data is updated, and how this is done. In addition, they’ll need to look at the security employed to protect both the oracle’s data source and transmissions, as well as its overall track record – how often has it been breached? How centralized is it? Who are the major stakeholders?
Decentralization is another concern, as some oracles are far more centralized than others. There’s also the question of transparency, and how open it is about the way it operates, and then there are the costs of using that oracle. Inevitably, the more frequently it updates its data streams, the more expensive it will be, because this means rewarding validators for their endless work.
Given these considerations, it’s clear that every dApp will need to make its own decisions, as it can provide significant gas fee savings to users if it isn’t reliant on a constant stream of up-to-the-minute data.
For instance, a DeFi platform will likely want to prioritize security and accuracy, but doing this usually comes at a cost of lower performance. Alternatively, a supply chain dApp will want to emphasize transparency, while a healthcare dApp must focus on privacy and accuracy.
What Are The Major Blockchain Oracles?
The crypto-focused venture capital firm Maelstrom has identified Chainlink, Pyth and Flare as three of the most promising players in the blockchain data oracle space. While all three do a similar kind of thing, they are differentiated in several important ways.
Chainlink
Chainlink currently dominates the industry, supporting more than 800 DeFi dApps and 500 DEX platforms due to its strong track record in terms of reliability and transparency. It’s based on a unique consensus mechanism and relies on hundreds of incentivized nodes that fetch and verify data from the real-world. It’s highly decentralized, although the Chainlink multisig still maintains a strong degree of control over its price feeds.
The advantages of Chainlink include its support for more than 5,000 trading pairs and the fact that its native token LINK accounts for 70% of the entire market cap of Oracle-based tokens. However, on the downside it is somewhat less performant than newer oracles, with its price feeds being updated less frequently, every few minutes in some cases and only once every few hours in other cases, depending on the exact trading pair and its underlying network. However, the platform is hard-wired to provide an automatic update in the event that an asset price deviates by more than 1%.
Pyth Network
Pyth is an up and coming oracle that’s much more focused on finance than other industries, and the value of its PYTH token has exploded in the last few months, in line with the rapid adoption of the protocol.
It has a number of advantages over Chainlink, such as its use of confidence intervals to quantify uncertainty over the accuracy of its price feeds, which is especially important for more volatile assets. It’s also multi-chain. Despite being built on Solana and its own Pythnet, it can publish its price feeds to almost any blockchain via integrations with bridges such as Wormhole. It has also designed a more efficient pull architecture, which enables on-demand price updates when requested by data users, as opposed to Chainlink’s push-based architecture, which only delivers data at regular, specified intervals.
Pyth claims a price feed refresh rate of between 300 and 500 milliseconds, which is blazing fast. However, this is due to its reliance on a select number of traditional financial institutions and centralized cryptocurrency exchanges as its data sources. This is a concern as this makes it less decentralized than Chainlink, while its integration with Wormhole is another potential vulnerability. Pyth is also yet to introduce its proposed staking mechanism to better incentivize data providers. In addition, Pyth is also somewhat limited in that it’s laser-focused on financial data at the expense of other kinds of data.
Flare Network
The third major player is Flare, which has designed a truly novel architecture that’s fundamentally very different from either Chainlink, Pyth or any other blockchain oracle, in fact.
The main difference is that Flare offers compute capabilities, in addition to its oracle network. It’s essentially a smart contract blockchain platform in its own right that features an integrated oracle system. With Flare, the nodes are responsible for both providing data to the network and validating and producing blocks. Its architecture is based on two moving parts, with the first being the Flare State Connector, which brings information from other blockchain networks and internet services and posts it to the Flare blockchain. This data can encompass anything from stock prices to weather reports, transaction confirmations to tweets. The second component is the Flare Time-Series Oracle or FTSO, which is responsible for delivering time-series data from other blockchains to Flare. It currently updates these feeds every three minutes, but a new proposal aims to bring that down to just 1-2 seconds, with the data being updated at every new block. Should the proposal be approved by the Flare community, these more rapid updates will be available for free to any dApp building on Flare, with a small fee charged to dApps hosted on other networks.
Thanks to its novel architecture and breathtaking potential speed, Flare’s data feeds provide a significant advantage over those offered by Chainlink and Pyth. On the other hand, the major disadvantage is that the project is still in its infancy, meaning there’s a lot of uncertainty over its future capabilities and adoption.
Final Thoughts
Blockchain oracles fulfill a vital role in the Web3 industry, providing a vital link between decentralized networks and the real world. They ensure smart contracts can access essential off-chain data, enabling many more use cases beyond basic DeFi.
The oracle ecosystem is one that’s buzzing, with a number of promising projects looking to take on market leader Chainlink, each with their own strengths and weaknesses. For dApp developers, the challenge is to find the most appropriate balance between accuracy, trust, reliability and performance, while also considering the long-term potential of the project itself.
Oracles are becoming more important to Web3 and the crypto industry by the day, and that will likely continue to be the case unless someone creates an entirely different method for blockchains to connect with the real world.