Top Oracles Protocols

Market Insights May 14, 2021

Blockchain Oracles are third-party services that feed smart contracts with external information. They serve as bridges between the blockchain and the real world, providing off-chain data (from markets, events and payments) to the on-chain network.

A smart contract (or digital agreement) is an application that runs on a blockchain and allows two parties to make commitments via a distributed ledger, without having to know or trust each other. Smart contracts were made popular by Ethereum, which runs them on the Ethereum Virtual Machine (EVM). Per their design, they can only manage data on the blockchain. Smart contracts allow for the creation of trustless protocols but, as they can’t access the real-world data, they require trusted external data sources which are currently provided by oracles. A robust oracle will source reliable data from multiple independent sources, check their accuracy and transmit them to the smart contract. The range of data  provided is wide with, for example, daily temperature, successful payment, the number of votes a candidate receives...

Oracles are designed in different ways:

  • Centralised Oracles (simplest form of oracle) when a single party provides the data but the drawback is the single risk of failure.
  • Distributed Multi-Sig Oracles, when a handful of parties are each whitelisted to place the data on-chain, and then the user can do any transformation they want before using the data. The issue here is that the degree of centralization is still high and still susceptible to manipulation.
  • Delegated proof-of-stake (dPoS) Oracles, when whitelisted staked nodes provide data and lose their stake if they provide bad data. This is better than a multi-sig as it includes economic incentives for data providers to behave well, but whitelisters and the whitelisting process still need to be checked carefully.
  • Prediction Markets Oracles, when participants vote on the right outcome by placing a bet on it. If you assume 51% of the participants are honest, it works and is decentralised but, speed, liquidity and even cost concerns have made them relatively untenable for many DeFi needs.
  • Decentralised Oracles, when there is an open network of data providers that reach consensus in a similar way to how a blockchain reaches consensus, using game theory and economic incentives. Decentralised oracles can be slow and expensive but manipulating them is expensive as well.

There is a high number of projects, so we have decided to focus only on the major and most innovative one, live on Ethereum.

  • Chainlink is one of the leading decentralised data oracles that seeks to eliminate the central point of failure present in prior oracle solutions. It went active in 2019 and inspired many other projects. The project is innovative and constantly introduces new data pairs/services. Anyone with a data feed or any other API can join Chainlink network and undertake jobs to retrieve and provide data to smart contracts. Node operators are paid in LINK which were created in connection with the launch of the Chainlink network through an ICO in 2017. Node operators will also be able to stake LINK to service certain smart contract requests that require collateral.
  • Band Protocol is the closest competitor to Chainlink and the second most valuable decentralised protocol. Initially released on the Ethereum blockchain in 2019, it has eventually built its own blockchain using COSMOS technology and a Proof of Stake consensus, allowing for reliable transaction speed and scalability. BAND offers cross-chain compatibility and data flexibility (ability to support both public and private data). Validators (candidates with the most BAND tokens) play a vital role in BAND protocol as they are responsible for checking the transactions and adding them to the blockchain.
  • DIA (Decentralised Information Asset) is an open-source, financial information platform for the DeFi ecosystem. It provides financial institutions with an immutable and verified single source of financial market data and utilises crypto incentives to source and validate the data. It aims to provide transparent, secured and verified market data.
  • Tellor (TRB) is a decentralised oracle using the proof of work (PoW) methodology: miners compete with each other to fetch the data and place it on-chain for the smart contracts. They are rewarded with the Tellor native currency TRB, after having deposited some TRB tokens in a pool as dispute resolution and governance.
  • API3 is a collaborative project governed by a decentralised autonomous organisation (DAO) for the creation of API’s for DAPPs called dAPI. dAPIs are blockchain-native, decentralised API services built by combining multiple operators and operating oracle nodes without any middlemen. API3 is aimed at building a transparent methodology to collaborate blockchains to the API’s of data providers. API3’s code is open source and its operations are transparent.

Most decentralised data oracle projects run as layer 2 applications on other blockchains, and it is worth mentioning that Aeternity (AE) is currently the only blockchain protocol running as a layer 1 application.
Blockchain Oracles have a wide spectrum of application and are revolutionising the whole DeFi ecosystem, providing a secure link between smart contracts and external sources feeding them with data. The trust put in the outside information is of utmost importance and, since oracles are third-party services and consequently not part of blockchain consensus mechanism, different trusted computing techniques are therefore used to ensure the security of the mechanism.

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Caroline Jacquard

Seasoned marketing manager with 15+ years of experience in the financial industry: traditional finance, alternative investment and digital assets. Advisor