Oracles aren’t the most sexy topic in crypto, but they’re an extremely important aspect of the underlying infrastructure of onchain activities. In a trading/DeFi context, oracles are primarily responsible for providing price feeds to price assets. This is vital for DeFi derivatives. Perps traders need reliable oracles to use a protocol without risk of random or unpredictable liquidations. Those engaging in borrowing and lending also need stable oracle pricing to ensure their positions aren’t exposed to unwarranted liquidation risks, which is especially true for looping positions.
These usecases just scratch the surface of what is enabled by oracles in DeFi. While Chainlink emerged as the first prominent oracle network and set the gold standard in the space a number of protocols has since emerged to build upon the groundwork and provide flexible solutions. In this edition, we’ll be focusing on Pyth, API3, and RedStone Oracles, some of the foremost players in the space.
Background on Pyth
Pyth Network is an oracle protocol that connects the owners of market data to applications on multiple blockchains. Developed by Douro Labs, the protocol provides high-frequency financial market data from first-party providers like Jane Street and Virtu Finance. Pyth Network differentiates itself by sourcing data from numerous first-party financial firms and crypto exchanges.
According to Douro Labs CTO Jayant Krishnamurthy, Oracle users prioritize security, reliability, and then speed, in that order, due to the high stakes involved in maintaining accurate and secure data feeds. The design priorities of Pyth network, highlight its decentralized nature, which enhances security and reliability without significantly compromising speed, managing to update prices every 400 milliseconds.
When it comes to organizational and protocol structure, Pyth operates as a decentralized protocol and Douro Labs does not control user participation, which is managed by Pyth governance through a council elected by token holders. Douro Labs monitors activities and can suggest actions but ultimately cannot make unilateral decisions. Today, Pyth is widely used across the industry by derivatives protocols, securing some $4.5B in value.
Background on API3
API3 is a collaborative project aiming to deliver traditional API services to smart contract platforms in a decentralized and trust-minimized way. The protocol is a first-party push Oracle where nodes directly push data onto the blockchain. API3’s security features include the fact that their nodes push data directly to the blockchain without a middle layer, enhancing transparency and verifiability. Oracle issues are dealt with by including 24/7 monitoring and the ability to swap out unreliable providers, maintaining system integrity through rigorous oversight and provider management.
When it comes to recent initiatives, the team is excited about the launch of OEV, a solution to MEV, and the revenue potential it brings, highlighting the advantage over traditional Oracles like Chainlink in adapting to new blockchain launches. The team has been notably critical of Chainlink, noting centralized control mechanisms like the multisig that can alter node operator status. Ashar L Shahid, DeFi Lead and Blockchain engineer at API3, criticizes the viability of crypto-economics in Oracles, explaining the mismatch between the financial risk and actual market cap, implying that the current model is ineffective in ensuring security.
Background on RedStone Oracles
RedStone Oracles is an Oracle that delivers frequently updated, reliable, and diverse data feeds for dApps and smart contracts on multiple L1s & L2s. The Oracle provider utilizes both push and pull methods, with a current focus on push, and aims to build infrastructure for fetching prices from on-chain trading venues. democratizes the updating process. The pull model democratizes the updating process. However, during critical times, like market crashes, the push model is vital due to the need for reliable and timely updates on blockchain states. For this reason, the push model remains the gold standard in Oracles due to the reliability concerns and the importance of robust infrastructure to ensure accurate on-chain data representation. Despite this, RedStone sees pull as the potential endgame for Oracles. The pull model differs by allowing data to be verifiable and accessible without being directly pushed onto the blockchain. Instead, anyone can update the blockchain state using this verifiable data.
Redstone focuses on both sourcing data from institutional providers and developing infrastructure for price fetching from on-chain venues. Redstone focuses on redundancy and a decentralized network. The protocol places an emphasis on security and also contains a unique price discovery mechanism for on-trade trading, which uses liquidity and slippage instead of volume, making it harder to manipulate.
Redstone is still transitioning and lacks a token, which limits their protocol’s capabilities compared to others. There is significant monitoring and programming to handle potential issues related to TGE, and increased autonomy post-token launch can be anticipated.