Revelo Roundtable #10 - Oracles

In Revelo Intel’s Twitter Spaces which took place on April 18, 2024, Kirk hosted Jayant Krishnamurthy from Douro Labs, Ashar L Shahid from API3, and Matt Gurbiel from Redstone Oracles to discuss the evolution and impact of Oracle models in blockchain technology and more! Read our notes below to learn more.

Background

Kirk (Host) – Head of Business Development at Revelo Intel

Jayant Krishnamurthy (Guest) – CTO at Douro Labs and Contributor at Pyth Network

Ashar L Shahid (Guest) – DeFi Lead and Blockchain Engineer at API3

Matt Gurbiel (Guest) – Head of BD at Redstone Oracles

Douro Labs – Building the Oracle tooling, products, and Web3 infra to Pyth Network’s suite of decentralized data services

Pyth Network – an oracle protocol that connects the owners of market data to applications on multiple blockchains

API3 – a collaborative project to deliver traditional API services to smart contract platforms in a decentralized and trust-minimized way

Redstone Oracles – an Oracle that delivers frequently updated, reliable, and diverse data feeds for your dApp and smart contracts on multiple L1s & L2s

Exploring Oracle Models in Blockchain: Shifts and Strategies in Data Handling

Jayant talks about Douro Labs, working on Pyth Network, an Oracle that provides high-frequency financial market data from first-party providers like Jane Street and Virtu Finance.
Ashar explains that API3 is a first-party push Oracle where nodes directly push data onto the blockchain.
Matt describes Redstone as an Oracle provider that 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.
Jayant says that Pyth Network differentiates itself by sourcing data from numerous first-party financial firms and crypto exchanges.
Matt explains that Redstone focuses on both sourcing data from institutional providers and developing infrastructure for price fetching from on-chain venues, mentioning that Redstone sees pull as the potential end game for Oracles.
Jayant explains that historically, Oracles operated on a push model where operators continuously update blockchain contracts with off-chain data, such as asset prices. This model involves operators committing to regular updates.
Jayant highlights the emergence of the pull Oracle model, which 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.

Oracle Models: Push vs. Pull Dynamics and Their Impact on Blockchain Efficiency

Kirk asks about the transition from the push to the pull model in Oracles and its implications.
Ashar discusses the advantages of the pull model, which democratizes the updating process. He highlights that during critical times, like market crashes, the push model is vital due to the need for reliable and timely updates on blockchain states.
Ashar says that despite the potential benefits of the pull model, 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.
Matt explains that protocols like Aave or Compound benefit from frequently updated prices, enabling better loan-to-value ratios and overall protocol efficiency.
He mentions that while many prefer a push model due to existing code dependencies, future versions of these protocols might become interface-agnostic.
Matt says that on cheaper blockchain networks, continuous price updates could become feasible, blending the push-and-pull Oracle models into a default one. He highlights the potential for continuous updates to enhance the utility of Oracles on cost-effective chains.
Jayant asks if, on cheaper chains, continuous price updates could simplify the Oracle model or if innovative software interfaces could handle updates more discreetly.
Matt says that his main point is about the push Oracle model, where price updates are driven by external entities rather than end users, suggesting that if chain costs are low, continuous updates could standardize Oracle operations across different use cases.
Ashar provides an example of a fast blockchain with a push Oracle that allows for seamless signature integration across chains, turning push Oracles into pull ones on other networks. He highlights the importance of who controls the on-chain data.

Prioritizing Security, Reliability, and Speed in Oracle System Design

Kirk talks about the evolution of Oracle models, questioning the primary considerations and necessary trade-offs in designing these systems, such as speed, security, and reliability.
Jayant highlights that Oracle users prioritize security, reliability, and then speed, in that order, due to the high stakes involved in maintaining accurate and secure data feeds.
Jayant discusses the design priorities of the Pyth network, highlighting its decentralized nature, which enhances security and reliability without significantly compromising speed, managing to update prices every 400 milliseconds.
Ashar highlights that security and reliability are critical, especially since push Oracles, though not very fast, excel in security for on-chain navigation, despite being costlier.
Matt says that the necessity for speed in Oracles depends on the use case and user, with high-leverage scenarios requiring frequent updates, which ties speed to security and reliability, particularly in lending markets.
Kirk comments that speed and security are intertwined, suggesting that frequent updates can mitigate the impact of a bad or manipulated feed.
Jayant addresses the topic of security, stressing the importance of redundancy in Oracle systems to prevent manipulations and ensure system robustness, explaining that the decentralized nature of their platform increases reliability by requiring multiple failures for a system breakdown.
Matt explains that Redstone focuses on redundancy and a decentralized network. He highlights the importance of security and its unique price discovery mechanism for on-trade trading, which uses liquidity and slippage instead of volume, making it harder to manipulate.
Ashar discusses API3’s security features, highlighting that their nodes push data directly to the blockchain without a middle layer, enhancing transparency and verifiability.
Kirk asks about the process behind handling Oracle misreporting at API3.
Ashar describes API3 for dealing with Oracle issues, including 24/7 monitoring and the ability to swap out unreliable providers, maintaining system integrity through rigorous oversight and provider management.

Decentralization: Insights and Challenges in Oracle and Protocol Governance

Jayant explains that Pyth operates as a decentralized protocol and that Douro Labs does not control user participation, which is managed by Pyth protocol governance through a council elected by token holders. He adds that Douro Labs monitors activities and can suggest actions but ultimately cannot make unilateral decisions.
Kirk questions the efficiency of decentralized decision-making and asks about potential delays in emergency responses, expressing curiosity about how it has played out so far.
Jayant admits limited experience with the decentralized model but notes that a group of decision-makers typically gathers within hours via communication platforms like Telegram, although immediate actions are unlikely.
Matt says that Redstone is still transitioning and lacks a token, which limits their protocol’s capabilities compared to others. He highlights the significant monitoring and programming to handle potential issues and anticipates increased autonomy post-token launch.
Ashar comments on the illusion of decentralization in Oracles, including Chainlink, noting centralized control mechanisms like multisig that can alter node operator status. He says that true decentralization is rare and often misunderstood in the Oracle space.
Jayant points out that data providers represent a centralization point, regardless of Oracle’s structure, and highlights the inherent centralization in systems that rely on few data sources.
Ashar discusses the varying degrees of centralization, mentioning Ethereum’s block production as an example, and says that Oracles, in general, are more centralized than commonly perceived.
Matt explains Chainlink’s operation, stating that while they project decentralization, the reality involves a significant reputation component that influences node operation, undermining a purely cryptoeconomic security model.
Ashar 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.

Future and Profitability of Oracle Providers in Data Markets

Kirk asks about the competitive landscape among premier data providers, noting that their limited number seems to set the market in terms of pricing and availability.
Jayant says that the data belongs to the providers, and they can choose to sell or share it, emphasizing that their role is to facilitate this process.
Kirk questions the business model of Oracles, asking how they generate revenue.
Matt explains that as an Oracle provider, they can monetize through various market sides, including the new chains that join the ecosystem, which historically involved substantial fees. He says that the competition is increasing, leading to potentially lower premium deals.
Matt mentions another revenue stream from protocols using their price feeds, citing a specific deal with GMX that involves a percentage of protocol fees. He expresses a preference for a transaction fee model, which would allow collecting a small fee on every transaction facilitated by Oracle.
Jayant adds that a transaction fee model, controlled by governance and currently at a low rate, could work if the volume of transactions is sufficient to support a low-margin business model.
Ashar says that in API3, they have realized that the Oracle industry is unprofitable except through token strategies, which he considers akin to Ponzi schemes. He criticizes Chainlink’s value and questions the utility of governance tokens.
Ashar explains that they’ve identified Oracle extractable value (OEV) that can trigger significant financial events like a $10 million liquidation. This discovery allows them to monetize Oracle updates through an auction-based model, moving away from traditional models to one that can force updates and trigger profitable events.
Ashar adds that this model has saved protocols like Aave and Compound nearly $100 million over three years, with API3 taking a small percentage fee. He highlights the scalability of this model in line with DeFi’s growth.
Matt credits API3 for popularizing OEV, a term they may have coined. He acknowledges the value such transactions can unlock, particularly in volatile markets, and indicates that they are considering deeper engagement with this concept.
Ashar says that API3 coined the term OEV, which is specific to Oracles, and notes that they plan to launch related initiatives soon.

Blockchain Innovations and Expansions: Developments and Opportunities

Jayant expresses interest in the development of perpetual protocols, noting their proliferation and the potential for more trading to move from centralized to decentralized platforms, improving user experience.
Ashar states his excitement about the launch of OEV and the revenue potential it brings, highlighting the advantage his team has over traditional Oracles like Chainlink in adapting to new blockchain launches.
Matt discusses the high demand for Redstone Oracle services and the challenges of managing both the organizational and technical demands this growth entails.
He shares his interest in institutional engagement with blockchain, specifically citing BlackRock’s involvement in Ethereum and tokenized basis trades.
Matt notes the collaboration with LRT protocols and the anticipation of seeing new primitives used in production. He mentions the broad activities in blockchain across various platforms, including Solana and Sui, and expresses excitement about the legitimacy brought to their industry by traditional financial instruments like the Bitcoin ETF.

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Show Information

Medium: Twitter (Audio)
Show: Revelo Intel Twitter Space
Show Title: Revelo Roundtable #10 – Oracles
Show Date: April 18, 2024