The blockchain oracles sector is an incredibly important part of the cryptocurrency market that affects both operators and users of Web3 applications. As of Summer 2022, it has a total market capitalization value of $4 billion, with thousands of decentralized applications (dApps) relying on various oracle providers on a daily basis.
The term “oracle” originated from Greek mythology, where it referred to an individual with the ability to talk directly to gods and predict future events. However, oracles in blockchain technology do not have the power of precognition; instead, they access data that has already happened.
If you’ve done even a tiny bit of research on blockchain oracles, chances are you’ve already come across Chainlink. In this article, we’ll take a closer look at the popular platform, discuss why more and more projects are searching for alternatives and look at other promising options that attempt to address Chainlink’s shortcomings.
Is Chainlink still the best crypto oracle in 2023?
There are various oracle providers that mainly differ in their centralization/decentralization, as well as interoperability. Popular examples include Band Protocol and API3. However, the most widely used by far is Chainlink.
Chainlink was one of the first oracles to be developed and has since become the standard in the blockchain space. The service focuses mostly on price data feeds, which means that it is particularly interesting to decentralized exchanges, lending platforms, and related businesses. Although ChainLink is a market leader, numerous voices have pointed out several flaws of the platform that may lead to customers migrating to other platforms or diversifying their oracle usage over the next few months and years.
Centralization and other problems
One of the most critical factors when assessing the security and reliability of an oracle provider is its decentralization. Unfortunately, this aspect is also one of the biggest criticisms of Chainlink. In the words of Vitalik Buterin, co-founder of Ethereum, Chainlink’s “security model is too centralized for me to be satisfied with it being the solution to all oracle problems.”
Some argue that this can potentially lead to a massive black swan event that could affect most DeFi application if an oracle like Chainlink becomes compromised.
Hundreds of DeFi apps are using Chainlink oracles, and *all* DeFi protocols are interlinked regardless.
If 3 of these 20 keys are compromised in any way (hack, regulatory attack, etc), DeFi could experience an unprecedented black swan and suffer irreversible destruction.
— Chris Blec (@ChrisBlec) May 4, 2022
Besides a looming black swan event, there are already several incidents in which users of oracles got hurt significantly due to flaws in their security mechanisms. For example, Chainlink temporarily stopped the price feed in May due to extremely unfavorable market circumstances with the LUNA token. According to an official statement, the unprecedented volatility in the cryptocurrency markets triggered the minimum value circuit breaker for the LUNA/USD price feeds.
Notably, the development caused a price discrepancy for two decentralized finance (DeFi) protocols. DeFi lending platform Venus Protocol explained that when Chainlink paused the LUNA price feed, the LUNA price on their platform stayed at $0.107 while the market value was at $0.01. Overall, the project lost $11.2 million as a result of Chainlink’s halting of LUNA price updates – funds that the project was never able to reclaim.
In addition, Blizz Finance, a lending protocol for Avalanche, was also impacted. Several attackers injected millions of LUNA, worth $0.10 according to the Chainlink oracle, into its system in order to borrow all of the collateral. As a result of this action, Blizz Finance stated that its protocol had been emptied before the team could take action to correct it.
Friendly reminder that the oracle problem has never been solved in computer science and Chainlink is a scam. https://t.co/ZJftEZ1HoM
— Cory at Swan Bitcoin (@coryklippsten) May 13, 2022
Since blockchain projects heavily depend on the accuracy of oracle data, many experts believe that data sources should be transparent to the public. In the case of Chainlink, however, data sources are hidden. For all we know, several node providers may draw their data from the exact same source. This means that if multiple oracle providers get their information from the same biased, malicious, or hacked source, then the whole data stream could be compromised in a Sybil Attack.
Returning to the argument of centralization in some major oracle protocols: The decentralization of the oracle node in combination with the opacity of the data source can lead to the illusion of decentralization, when in fact there is hidden centralization.
There are also examples showing what this could mean in real life. As Blockonomi reported, Chainlink once accidentally broadcasted false price feed data, which saw the Silver/USD price switched with the Gold/USD price. The cause of this issue: the majority of Chainlink node operators used the same (false) data source.
If there were transparency about which node operators draw from which sources, then users could at least assess the risk of a Sybil attack more accurately. On the other hand, if node operators could be forced to draw their data from different sources, then perhaps problems like this could be avoided altogether.
Besides centralization and opaqueness, there are also reports that more and more users are generally frustrated with the virtual monopoly Chainlink enjoys. According to an anonymous source, the Chainlink team does not respond quickly to customer issues, while the network itself is expensive to use, and the high gas fees make it impractical for many applications.
What are the best Chainlink alternatives?
Chainlink’s flaws have led to the development of new oracle services that seek to address these issues of data source transparency, decentralization, and security. These projects are not without their own challenges but offer viable solutions for blockchain applications that require external data.
Some of the most popular Chainlink alternatives are:
- NEST protocol, a truly decentralized oracle that provides information for pricing pairs without the risk of manipulation from a third party
- Band Protocol enhances smart contract functionality by giving them access to credible data without any central point of failure;
- DIA (Decentralized information asset), an open-source platform that allows market participants to obtain, share, and trade trustworthy data
- API3’s secure data feeds that are provided directly by the oracle node operators and that are managed by a DAO make it easy to create innovative decentralized applications.
API3 is the newest and perhaps the most promising out of all the examples listed above. Like Chainlink, it is a platform that allows blockchain-based decentralized apps to connect to external real-world data and services via application programming interfaces (APIs). However, what sets API3 really apart from competitors is the transparency and quantifiable security of the numerous data feeds it offers.
What is API3?
API3 was established in 2020 by Heikki Vänttinen & Burak Benligiray, some of which were already previously engaged with the Honeycomb API Marketplace. Notably, Honeycomb was based on Chainlink and actively operating Chainlink notes. However, the API3 founders claimed that Chainlink’s architecture was preventing them from making Honeycomb API-centric, which led to the split off and start of API3.
The team recognized that the oracle concern is not blatantly technical. Instead, the prime issue lies with getting lots of diverse, autonomous entities to agree to cooperate in a decentralized manner so that business objectives can be met. So far, API3 has approximately 50 contributors and received $3 million during its seed round of investment. The main investors include Placeholder, Pantera Capital, Accomplice, CoinFund, Digital Currency Group, and Hashed.
“The best thing to come out of Honeycomb was that it acted as a laboratory and an incubator for API3. Above all, it affirmed that API providers must be considered a critical component of an oracle solution, and paved the way for API3 to become the API-centric solution it is today,” Burak Benligiray, Core technical team lead at API3.
API3 is open-source and aims to be the new standard data oracle for Web 3.0 applications. The protocol has initially been built for Ethereum-compatible (EVM) blockchains such as Ethereum, Polygon, Binance, and many more, but it intends to expand to non-EVM chains as well.
Will API3 overtake Chainlink?
While a definite answer to this question is difficult to provide, one might argue that API3’s model of a decentralized network of API providers offers greater security than other oracle protocols on the market. These providers are chosen through a stake-weighted voting system. This means that API3 is less susceptible to Sybil Attacks than Chainlink. API3 has developed its own decentralized APIs (dAPIs) in order to decentralize the process of off-chain data migration to the on-chain environment. These are completely decentralized APIs that are fully compatible with blockchain technology and do not require proprietary technology or access from a rent-seeking node operator.
Crucially, API3’s dAPIs aggregate data directly from first-party data sources, enhancing transparency, lowering the risk of third-party data tampering, and eliminating the need for rent-seeking middlemen. In addition to greater transparency and security for dApps, this also results in more revenue going straight to API providers.
API3 further distinguishes itself from other blockchain data oracle initiatives such as Chainlink by offering a data feed insurance (officially marketed as “service coverage”), which compensates dAPI users in the case of false data feed get broadcasted. Therefore, projects like Venus Protocol and Blizz Finance would have been compensated for their losses if they had worked with API3.
First-party oracles: critical infrastructure
As mentioned above, and unlike other oracle projects, API3 uses first-party oracle nodes. These nodes are managed directly by data providers. To do so, API3 utilizes a technology known as Airnode that enables API vendors to convert their APIs into dAPIs.
Airnode connects data feeds to the blockchain at the source level, eliminating the need for intermediary nodes and allowing dApps to access information directly. Moreover, it is a serverless oracle node that may be quickly set up by an API provider without requiring much maintenance. As a result, oracle API providers can use Airnode to add extra data to their monetization streams in the decentralized universe.
Airnode was built to make the process of becoming a first-party oracle node simple and frictionless for API providers, according to API3’s design thinking. It is meant to be a do-it-yourself installation that doesn’t require blockchain expertise.
dApps that utilize the dAPI network will pay a subscription charge via stablecoins, such as USDC and USDT. However, API providers who do not want to deal with cryptocurrency may choose to receive payments in fiat currency instead. This is a welcome contrast to Chainlink and other oracles, where users have to buy LINK tokens to pay for oracle subscriptions and thus risk a devaluation of their funds.
The API3 token allows anyone interested to participate in community governance by staking the tokens in the insurance contract. Stakeholders receive rewards for their participation, which incentivizes more involvement and value creation within the network.
What to expect from blockchain oracles in 2023?
Blockchain oracles will become increasingly important as the amount of data that needs to be accessed by smart contracts grows. The goal of oracle networks is to provide this data in a secure and decentralized way. The future of blockchain oracles is still being developed, and it’s hard to say which projects will ultimately succeed. However, as supported by Buterin’s comment, multiple oracle projects are, in fact, likely to succeed in the following years.
We expect to see more developments in terms of oracle application. Currently, price feeds represent the most demanded data type for oracle providers. As the blockchain industry advances, anything from sports betting to post deliveries could require state-of-the-art oracle providers to guarantee reliable and smooth Web3 applications.
Image by Gerd Altmann from Pixabay