Oracle Machine: An Indispensable Key Middleware in the Web3 Ecosystem

With Vitalik's recent article mentioning the ultimate Oracle Machine issue, "Oracle Machine" has once again become the focus of attention in the crypto community. Currently, Oracle Machines play an irreplaceable role in various fields such as insurance, finance, random prediction, and the Internet of Things. As long as off-chain data remains valuable, middleware like Oracle Machines will continue to play a key role in the entire Web3 ecosystem, mainly reflected in the following aspects:

• As the Web3 ecosystem continues to develop, the increasing number of dapps and platforms is expected to drive an explosion in the demand for Oracle Machine data sources and APIs. In the future, dapps, particularly DeFi exchanges, are likely to integrate multiple Oracles (, usually using one as the primary data source and 1-2 as cross-validation backups ) to obtain off-chain metadata, in order to avoid unbearable losses caused by single Oracle delays or attacks.

• Although traditional DeFi's Oracle Machine, which focuses on data feeding, is unlikely to break Chainlink's monopoly position in the short term, there remains about 10% of the market that offers space for a second competitor. In addition, there have been noteworthy innovative protocols and narratives for Oracle Machines in niche areas such as L2, credit, NFT, and DID.

• Based on the experience of DEX and L1, looking at the incremental market demand and L2/ZK as well as emerging sub-segment scenarios, it is unlikely that the Oracle Machine track will be monopolized by a single winner in the long run. Directions such as off-chain computing scenarios, pricing of non-standard on-chain assets like NFTs, and the deep integration of AI/ML still have greater development potential and market space worth exploring.

The following will delve into the concept, classification, application scenarios, and investment opportunities of the Oracle Machine.

Interpretation of Oracle Machine

Concept

Oracle Machine ( oracle ) is typically regarded as a bridge that connects on-chain and off-chain data, serving as middleware that provides reliable off-chain data services for blockchain projects.

The main reason for the need for an Oracle Machine is that the trust generated by the current blockchain itself is not sufficient to support all the demands of upper-layer applications; therefore, an Oracle Machine is needed to inject more trust.

• Currently, the data volume off-chain and on-chain is still unequal. Compared to the off-chain real world, which has a rich variety of data types and a large amount of data, the data volume in the on-chain world is far from sufficient to support its independent development completely detached from off-chain. Most protocols today would struggle to survive without access to Oracle Machines.

• This is also why Oracle Machines are often referred to as the "necessary evil" of blockchain. In the future, if the richness of on-chain data surpasses that of off-chain, we may no longer need to rely on Oracle Machines or similar relay agents. This is also the fundamental reason why many DEXs and DeFi protocols insist on oracleless native on-chain design.

Blockchain is a closed system that cannot connect to the internet directly. Smart contracts cannot directly access deterministic information from the internet and the real world, such as stock prices, exchange rates, election results, etc., and due to the consensus mechanism, a trusted third party is also needed to validate the data. Therefore, the Oracle Machine plays the role of a broker in bridging on-chain and off-chain trust.

It is worth noting that the key issue solved by the Oracle Machine is not how to obtain information from the real world; anyone can upload off-chain data to on-chain (. The real challenge is how to help the blockchain trust information coming from the real world ). Even if someone sends off-chain data to on-chain, it will be of no use, as no one will believe and adopt it (.

Trust is generated through communication, not just connection. The intrinsic value of the Oracle Machine depends on its ability to facilitate communication between on-chain and off-chain, that is, by forwarding, verifying, and filtering information to inject trust into off-chain real-world data. Therefore, the key to judging the quality of an Oracle Machine lies in its level of trustworthiness.

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) Category

According to the form, oracles can be divided into software oracles and hardware oracles:

• Software Oracle Machine: Provides API/SDK and other services to assist protocols in accessing and transmitting data from third-party servers, such as product prices, weather indexes, flight numbers, etc.

• Hardware Oracle Machine: Widely used in IoT, commonly seen as electronic sensors and data collectors.

According to data sources, they can be divided into centralized Oracle Machines and decentralized Oracle Machines:

• Centralized Oracle Machine: Typically integrates a single trusted third party such as government departments, official institutions, reputable companies, etc. to provide data. The advantage is that it can separate data from untrusted operating systems on local devices, preventing data tampering and loss. The disadvantage is that a single centralized data source brings the risk of a single point of failure.

• Decentralized Oracle Machine: An oracle with a distributed consensus mechanism, also known as a consensus oracle. It retrieves data from multiple rather than a single external source, making it more reliable and trustless.

Centralized Oracle Machines have advantages such as efficiency and feasibility. Decentralized Oracle Machines are more trustworthy and secure due to their discrete multi-node and cross-reference processes.

When efficiency is not the primary goal, centralized solutions are not the most desirable. Clearly, the information provided by a single node is likely to be biased and dogmatic; in this case, authority comes from despotism rather than credibility.

Due to the requirements and concerns regarding trust risk management, most DeFi applications basically directly adopt third-party decentralized Oracles like Chainlink, instead of independently creating a simple centralized Oracle or running their own nodes to transport off-chain data to the on-chain.

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) Application Scenarios

In 2021, the Chainlink 2.0 white paper first introduced the concept of the DON### decentralized Oracle Machine network (. DON is a network maintained by a group of Chainlink nodes, allowing Chainlink to provide external data to the blockchain through trustless off-chain computation. To realize this vision, Chainlink launched a series of products and services such as VRF, Keepers, and CCIP, further expanding the application scenarios of the Oracle Machine in web3. The table below lists application cases of the Oracle Machine in different scenarios such as DeFi, NFT, GameFi, Social, DAO, and cross-chain.

| Scene | Specific Requirements | Functional Services | |------|--------|---------| | DeFi | Feed Price | VWAP | | DeFi | Fair Ordering | anti-MEV | | NFT | Community Airdrop | VFR | | NFT | Feeding Price | TWAP | | GameFi | Random Scene Generation in Games | VRF | | Social | User Graph, User Profiling | DID | | DAO | Community Airdrop, Community Governance | DID | | Cross-chain | Cross-chain information, asset transfer | Cross-chain bridge |

) Track Map

We can simply classify the Oracle Machine from three dimensions:

1. According to specific functions, in addition to the common defi Oracle Machine, it also includes credit Oracle Machine, NFT Oracle Machine, and identity ###DID( Oracle Machine.

2. According to the data source, it can be divided into first-party Oracle Machines, third-party Oracle Machines, and multi-party Oracle Machines.

3. According to the data processing methods, they can be divided into game theory-based Oracle Machine, reputation-based Oracle Machine, stake-based Oracle Machine, cryptography-based Oracle Machine, and aggregation-based Oracle Machine.

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Investment Opportunity Expectations

) Main Points

1. The traditional defi direction focused on data feeding and pricing functions of Oracle Machine finds it difficult to break Chainlink's monopoly in the short term, holding a market share of 80-90%###. However, there is still competition space for the second player in the remaining approximately 10% of the market:

• First, there is innovation in the consensus mechanism, such as the two proposals put forward by Vitalik:

  • Based on game theory, combined with PoS/PoW
  • The form of DAO committee/decentralized court

• Second, there has been a significant improvement in the cost-performance ratio, such as feeding prices or random number generation being cheaper than Chainlink. For example, Redstone and Ontropy claim that their feeding prices can be 80-100 times cheaper than traditional solutions.

2. Oracle Machines in niche fields such as L2, credit, NFT, DID, etc. have potential opportunities:

• The L2 Oracle Machine is primarily a native solution for the op/zk ecosystems, with low latency and security being the core concerns, while the cost of feeding prices is relatively secondary.

• The expansion progress of Chainlink on non-EVM chains needs to be considered. If the price feed on a certain chain has basically been monopolized by it, the difficulty of competition will greatly increase.

• L2 oracle should largely cater to the high-frequency trading demands of derivatives exchanges. Oracle Machine protocols like Pyth and Empiric, which offer more refined pricing or have a more robust data integration process, may have a competitive advantage.

• If the tokenomics is designed reasonably and incorporates more utility, the price of the tokens in the Oracle Machine protocol can be expected to perform more steadily.

• The credit Oracle Machine combined with on-chain credit expansion theory is likely to explode in the next cycle.

• The improvement and soundness of the on-chain credit rating system is a prerequisite for building on-chain insurance and recovery mechanisms, playing an important role in the overall development of DeFi.

• More attention should be paid to the differences in on-chain data verification and integration among similar products, such as the coverage, cleansing capabilities, and accuracy of credit ratings of on-chain data. A team with a strong background in financial engineering or actuarial skills is a good plus.

• The engineering of the off-chain credit system going on-chain is more complex than expected:

  • A single project is difficult to directly link with the social credit system of a certain country.
  • The barriers to integrating off-chain public credit data on-chain are not high.

• The NFT Oracle Machine is mainly divided into two approaches:

  • TWAP time-weighted average, currently cannot achieve VWAP due to insufficient trading volume.
  • The off-chain valuation pricing scheme that combines AI/ML is relatively more promising.

• DID identity Oracle Machine has high value in the long run:

  • The CanDID(DECO) team under Chainlink aims to create a decentralized on-chain identity infrastructure using multi-party computation and zero-knowledge proof technologies.
  • Currently, most identity Oracle Machines are basically centralized, with low barriers.
  • Need to focus on its verification process and storage implementation method.

( Typical Case Analysis

Based on the above investment perspective, we selected a case for brief analysis in each sub-direction:

| Name | Segment | Chain | Twitter Followers | Business Model | Data Source | Financing | Highlights | |------|------|----|---------|---------|---------|----|------| | Redstone | Defi Oracle Machine | EVM compatible L1 and L2 chains, Starknet, Fuel Network | 9606 | 2B | 50+ on-chain and off-chain CEX/DEX + third-party datasets | 2022 $7 million | - Data permanently stored on Arweave, provider reputation traceable
- Refunds available for data errors
- Price feeding is much cheaper than Chainlink | | HyperOracle | L2/ZK Oracle Machine | EVM compatible chain | 2091 | 2B | On-chain ) data analysis platform, CEX, DEX raw blockchain data ( and off-chain ) zkGraph indexed data ### | 3 million USD in 2023 | - Paving new paths for verifiable scalable Ethereum computing power
- Based on ZK proofs and 1-of-N trust model
- Provides the market's only output Oracle Machine zkAutomation service | | CanDID(DECO) | DID Oracle Machine | EVM compatible chain | N/A | 2B/2C | Authoritative sources, social media, online banking, email and other off-chain data | Unfunded | - Compatible with traditional identity systems
- Supports secure backup and recovery of private keys
- Anti-witchcraft through MPC
- Provides identity information for KYC/AML audits in ZK manner | | CreDA | Credit Oracle Machine | Multi-chain such as Ethereum, Arbitrum, BSC | 9167 | B2C/2C | On-chain data, other DID networks, off-chain data | Unfunded | - Use AI to review multi-chain activities to calculate credit ratings
- Integrate off-chain credit rating providers
- Generate personal loan plans based on ratings
- Can feed back into off-chain financial activities | |