The RWA fire brings our focus back to the long-dormant oracle track.
The RWA fire revives the oracle track.
Author: LianGuaiBitpushNews Asher Zhang
On July 24th, Worldcoin, a cryptocurrency company founded by OpenAI CEO Sam Altman, announced the launch of the WLD token, which was highly sought after in the market as soon as it went online. By establishing on-chain IDs, it is accelerating the expansion of on-chain credit, which will greatly promote the development of credit oracles. So, what are the application scenarios for credit oracles? And what are the mainstream oracle projects in the crypto market?
Why is the oracle track worth paying attention to?
RWA essentially brings real-world assets into the blockchain, turning them into on-chain assets and further transforming off-chain transactions into transparent on-chain transactions. In the process of transactions, off-chain data needs to be transmitted to the blockchain, and this is where oracles come in. Oracle is essentially a technology that brings real-world data into the blockchain, used as a tool to obtain and verify external data on the blockchain. In the previous bull market cycle, the leading oracle Chainlink skyrocketed mainly due to the explosion of “DeFi Summer”. Recently, the RWA track has become very hot, with various real-world assets being continuously put on the chain, increasing the demand for oracles. Therefore, in the future, during the booming process of the RWA track, the oracle track is worth paying attention to.
In addition to the RWA track, oracle in specific areas is also worth paying attention to, such as L2, credit, NFT, DID, and other directions that have potential opportunities. L2 oracles mainly have native solutions for the op/zk ecosystems, with low latency and security being the core concerns, and cheap price feeds being relatively secondary. Oracle in the credit and DID directions is more likely to explode in the next bull market, which will be emphasized later in the article.
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How to classify the oracle track?
The oracle track is actually a very broad track, and it can be classified differently according to different scenarios.
In terms of oracle forms, it can be divided into software oracles and hardware oracles. In terms of data sources, it can be divided into centralized oracles and decentralized oracles. Centralized oracles usually only integrate data from trusted third parties such as government departments, official institutions, and reputable companies. Decentralized oracles refer to oracles with distributed consensus mechanisms, also known as consensus oracles.
In addition, there are also consortium oracles and TWAPs. Consortium oracles are a special form of decentralized oracles, where the node network is composed of not only ordinary nodes but also designated trusted institutions as nodes. For example, MakerDAO’s v2 version of the oracle includes institutions such as dYdX and 0x. TWAP is a price oracle introduced by Uniswap. Its data source comes entirely from the transaction data of the Uniswap protocol itself, and the data acquisition and processing are also carried out entirely on-chain. The principle of TWAP is based on the token price at the last transaction in each block, combined with the block time, to calculate the total price sum of a token in the entire history of the protocol, so that an average price can be recalculated when used.
What are the mainstream oracle projects?
ChainLink is a leading project in the field of decentralized oracles. It provides middleware for blockchain smart contracts to call external data. Chainlink is the world’s first decentralized oracle, and its clients include top internet companies such as Google Cloud and Oracle. Compared to other oracle projects, Chainlink has relatively higher fees.
Band Protocol is an oracle project running on the Cosmos blockchain. Band’s most distinctive feature is its cross-chain oracle solution, which extracts data from web-based APIs. Compared to Chainlink, Band Protocol is cheaper and can directly access external data. However, Band Protocol has relatively fewer eco-projects.
UMA is an economic game oracle. The project has two main technical features: the Data Verification Mechanism (DVM), which is a decentralized oracle service, and priceless financial contract design, which can be used to create synthetic tokens. The DVM design ensures that the cost of attacking the oracle exceeds potential profits. Priceless financial contracts can function without on-chain price feeds and minimize the use of on-chain oracles to reduce the frequency and scope of oracle attacks.
API3’s oracle solution allows APIs (data providers) to operate their own oracles without intermediaries such as ChainLayer and LinkPool.
Tellor combines PoW mining and PoS staking mechanisms to provide secure and decentralized data for DeFi protocols. The drawback of Tellor is that it cannot retrieve data in real-time, and storing data on Ethereum is relatively expensive.
NEST is a distributed price oracle that generates prices through bilateral quotes by miners. Validators can arbitrage if they find any deviations between the quoted price and the market price, and then directly generate prices on-chain. In contrast, other oracles like Chainlink provide oracle data by distributing nodes to feed data to on-chain contracts.
Other oracle projects include the aggregated cross-chain oracle PlugChain and the decentralized oracle ADAMoracle, which supports broad node price feeding.
How will the oracle track develop in the future?
The credibility of the data source is the most criticized aspect of oracles at present because many oracles still use off-chain data, which is generated under centralized mechanisms. The perfect oracle still has a long way to go, and the solution proposed by Vitalik Buterin is more practical. Ethereum founder Vitalik has proposed a solution in his article “Can oracles achieve common staking? How can RAI-like systems safely support staking ETH,” which will largely solve the potential risks of malicious behavior by oracles and is relatively easier to implement. In this article, Vitalik proposes three solutions: 1. Oracles as stakers; 2. Oracles as 2-of-2 stakers; 3. Hierarchical security semi-trusted oracles. These three solutions have their own advantages and disadvantages in terms of implementation difficulty, prevention of bad oracles, protection of bad CDP holders, and oracle operational incentives. However, Vitalik states that Solution 1 seems more feasible in the short term and will be an interesting supplement to earn additional staking rewards. However, Solutions 2 and 3 seem more trustless and durable, with lower trust in oracles and better maintenance of decentralized staking. Therefore, in the long run, Vitalik is more inclined to choose the latter two solutions.
From the perspective of application areas, with the expansion of on-chain credit, credit oracles may be the most worthy of attention in the next bull market. So, in which application scenarios are credit oracles expected to land first? Most likely, they will mainly focus on seven major application scenarios: legal identity proof, social identity proof, creative proof, financial proof, social reputation proof, personality proof, and interactive proof. Among them, the most noteworthy application scenarios are social identity proof, creative proof, and social reputation proof.
Outlook for Oracle Track
As a bridge connecting blockchain and the real world, oracles are still in the early stages of development. In the future, more efficient and secure oracle solutions will continue to emerge. Along with the development of the blockchain industry, more assets and application scenarios will be put on the chain, and the application areas of oracles will also become more extensive, such as finance, insurance, supply chain, and the Internet of Things. In addition, cross-chain interoperability is currently the most important trend in the blockchain industry. Therefore, it is highly probable that oracles will also achieve cross-chain data transmission and verification between different blockchain networks in the future, thereby breaking the existing isolation and improving the liquidity and efficiency of the entire blockchain ecosystem.