Looking Into the Oracles

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Health, Wealth, and Happiness

March 6, 2023

"Generally, the greater the stigma or revulsion, the better the bargain."

- Seth Klarman

In today's issue: To the ancient Greeks, the oracle was an intermediary between the gods and humanity.

In today's crypto landscape, oracles are intermediaries between crypto and the real world.

If you need to pull any kind of real-world data on-chain (from sports scores to political outcomes), you can use an oracle.

This has made oracles one of the proven use cases of blockchain technology, a foundational layer upon which all kinds of new applications are being built. As investors, we have the chance to invest in the leading oracles now.

You don't need to consult with the gods. Just read today's Sector Report on Oracles.

Must Read

Today's most important story for crypto investors.

Should Crypto Assets Be Included in an Investment Portfolio? (LinkedIn)

Finally, people are asking the right question.

For years we've been showing the superior performance of investors who put small amounts of their portfolios into crypto. This article from Karl Seelig and David Doss agrees financial advisors can no longer ignore the demand.

The authors do a good job outlining the common-sense case for supporting crypto assets, while highlighting some of the potential challenges for financial advisors (complexity, risk, cost, accounting, taxation, security, and liability).

Still, the costs of not doing so "may deprive investors of an enormous potential return on their investment[s]."

Investor takeaway: Slowly but surely, the old-school financial industry is getting on board. This is good news for the long-term value of quality digital assets, and another positive sign that our message is catching on.

Premium Power-Ups

Level up your crypto investing game.

New Members-Only Workshop: Inside Stacks (STX)

What's behind bitcoin's price rise over the last few months?

Several new projects are turning bitcoin into a smart contract platform, and Stacks is leading the charge.

The Stacks token (STX) has quadrupled in price this year as the "bitcoin as smart contract platform" narrative takes hold. In this workshop, we'll describe how Stacks works, show you real apps building on it, and discuss our investor thesis.

Premium members: This members-only workshop is happening this Wednesday, March 8 at 6:30 pm ET. You can RSVP here.

Not yet a Premium member? Sign up now for just $10 a month and get access to the live event, plus our complete on-demand library of past workshops!

Sector Report: Oracles in 2023

by Anatol Antonovici

Summary: In this report, we discuss the evolution of blockchain oracles, their roles in decentralized finance (DeFi), and the investment opportunities in oracle projects like Chainlink, Band Protocol, and API3.

Blockchain is a revolutionary technology addressing several major problems in financial systems by bringing transparency to the space and cutting out the need for intermediaries. Nevertheless, it has limitations as blockchain networks are closed systems.

One solution to this problem is “oracles." The function of an oracle is to provide external data to closed blockchain networks.

Blockchain oracles offer secure and decentralized ways to bring off-chain data onto the blockchain, making it available to smart contracts and other dapps. One of their main functions is to verify the accuracy and authenticity of this data.

Here, we discuss the evolution of the blockchain oracles market and see what opportunities exist for smart crypto investors.

Industry Overview

Oracles enable decentralized applications to interact with external data sources, a must-have for many blockchain applications. Here are a few examples of how oracles can be used in decentralized finance (DeFi):

Price feeds: Decentralized exchanges (DEXs) require accurate and up-to-date price feeds. Oracles provide them by sourcing data from external exchanges.

Asset management: Oracles can help DeFi apps that involve the management of assets like loans, collateral, and derivatives, which require up-to-date data about the underlying assets.

Event triggers: DeFi apps may require certain events to occur before executing specific actions. For example, a smart contract may require a stock price to reach a certain threshold before executing a trade. Oracles can be used to trigger these events by monitoring external data sources and sending signals to the smart contract.

Weather data: Some DeFi apps use weather data to calculate risk and determine payouts for insurance products. Blockchain oracles can be used to provide accurate and timely weather data from external sources.

In other words, blockchain oracles act as intermediaries between decentralized networks and external data sources like web APIs, databases, IoT sensors, real-time data feeds, and other blockchain networks.

The oracle market is not as big as stablecoins or the DeFi sector, but we believe it's here to stay, as blockchains increasingly rely on oracles to run.

Chainlink (LINK) is by far the largest and most dominant oracle project. It is the only oracle chain in our list making the top 100 largest cryptos by market cap. The market caps of other protocols like Band Protocol (BAND), Nest Protocol (NEST), iExec RLC (RLC), and API3 don’t exceed the $250 million mark.

LINK is also the oldest oracle network (having launched in 2017), and its market cap of $3.8 billion makes it the 20th largest cryptocurrency.

During the crypto winter of 2022, the oracle market followed in the footsteps of the broader crypto space, losing over 60% of its value. LINK, BAND, and API3 fell by over 70%, while RLC lost over 60% of its market cap in 2022. NEST was launched in the middle of 2022, and it lost over 30% by the end of the year.

Chart via TradingView

The rebound of the crypto market in 2023 has helped the oracle sector, with all major players showing signs of recovery. In the first two months of the year, RLC and API3 have gained over 55%, while BAND and LINK have increased by 45% and 33%, respectively. Meanwhile, BTC increased by 40% over the same time.

Image via TradingView

Despite the major selloff during the crypto winter, the oracle sector has rewarded those who invested three years ago. LINK, RLC, and BAND have gained 307%, 386%, and 778% since 2020, beating traditional assets by a significant margin. During its peak in 2021, BAND’s 16-month return hit a staggering 9,000%.

Image via TradingView

The oracle market is still dominated by LINK, which will continue to play a key role in the coming years. However, there's an opportunity for smaller players as well, especially with the emergence of decentralized finance (DeFi) use cases.

Investment Thesis

As with all crypto investments, our thesis is buying and holding the native token (for example, LINK for Chainlink) is like investing in the underlying “company.”

Like a traditional company, oracle networks generate revenue by charging fees for their services. The native cryptocurrencies of oracles reflect the revenue dynamics, and many investors get exposure to oracle tokens due to their business models.

Given oracles have a strategic importance for blockchain (which continues to be adopted across many industries), investors have high expectations for this narrow sector.

The demand for blockchain technology is an indicator of the success of the oracle market as a whole as it provides a key infrastructure to decentralized networks. However, the crypto market is highly volatile, and this has had a direct impact on oracles.

Who’s Investing: Institutional Backing

The blockchain oracle ecosystem is still a narrow market, and many traditional institutional investors open to getting exposure to crypto aren't invested in it as they cannot accurately evaluate the importance of oracles.

On the other hand, institutions focused on blockchain are aware of oracles, and some are heavily invested in it. For example, in 2021, crypto fund Grayscale added LINK to its large-cap crypto fund. Grayscale also added the Chainlink Trust to its list of about 20 investment trusts. The investment product is aimed at institutional investors and has over $2 million under management.

The largest investment in Chainlink occurred during its 2017 ICO, where Chainlink raised $32 million. Some of the primary investors in this ICO round were Limitless Crypto Investments, Nirvana Capital, Fundamental Labs, and angel investors George Burke and Andreas Schwartz.

Top Oracle Projects

Chainlink (LINK)

Chainlink is a decentralized oracle network providing reliable and tamper-proof inputs and outputs to smart contracts on various blockchains.

It consists of a decentralized network of nodes that collect data from various sources like APIs, data feeds, and other off-chain systems. These nodes aggregate and verify the data before sending it to the requesting smart contract.

LINK’s market cap at the time of this writing is $3.76 billion at a price of $7.41, making it the 20th largest cryptocurrency. The token reached an all-time high in mid-2021 at over $50.

In 2022, the cumulative total of transaction value enabled (TVE), which represented the USD value of all transactions enabled by LINK, hit nearly $7 trillion. Chainlink supports over a dozen major blockchains and has over 1,000 oracle networks.

Last year, Chainlink Data Feeds delivered 5.8 billion data points to on-chain reference contracts, supporting dapps across blockchains and layer 2 environments.

With its Economics 2.0 upgrade, Chainlink is introducing new monetization models that may support its future growth. The upgrade includes initiatives like the Chainlink BUILD Program, the Chainlink SCALE Program, and Chainlink Staking.

Image via Chainlink Blog

Band Protocol (BAND)

Band Protocol is a blockchain oracle network launched in 2019. Band supports multiple smart contract blockchains and is part of the Cosmos Network, a blockchain network focused on interoperability.

Band Protocol is built on BandChain (which leverages the Cosmos SDK technology), using Tendermint’s Byzantine Fault Tolerant (Tendermint BFT) consensus mechanism. It has connectivity with other chains through Cosmos’ Inter-Blockchain Communication Protocol (IBC).

BAND, whose token is currently priced at $2, is the second-largest oracle network after LINK, with a market cap of $245 million.

BAND’s increased interoperability and security have helped it expand the ecosystem and use cases, which could help keep it relevant in the coming years.

Image via Medium

iExec RLC (RLC)

iExec is a decentralized network that connects cloud computing service providers and users in an open marketplace. Dapps that need computational resources can pay providers on the iExec network. RLC is the token used for operations on this decentralized marketplace.

In 2021, iExec introduced the Oracle Factory, which enables users to create custom oracles within minutes. The product leverages iExec’s TCE (Trusted Computing Environment), which uses hardware enclaves to protect the API.

Click to watch how it works.

So far, over 50 oracles have been created on the network, with most of them being price feeds. RLC is currently priced at $1.92 and has a market cap of $155 million.

The great thing about iExec is it combines several major use cases (including the rental of computing resources and oracles), which could help keep this network relevant in the coming years.

Nest Protocol (NEST)

NEST Protocol is a decentralized oracle network built on Ethereum and launched in 2022. It employs various modules to deliver secure and innovative solutions. Its primary focus is solving the problem of on-chain price accuracy through a decentralized incentive solution known as the price predictor.

In DeFi apps, accurate price data is critical to reflecting the actual asset price on an exchange. However, price data can be vulnerable to manipulation, leading to potential data attacks. NEST's price predictor verifies the asset price, ensuring timely and accurate data while avoiding risks associated with centralization.

By providing a secure and decentralized solution to the problem of price accuracy, NEST Protocol contributes to the growth and development of the DeFi ecosystem.

NEST’s market cap is currently about $70 million, and the token price hovers above $0.02.

API3 (API3)

Dubbed the "Chainlink killer," API3 is a decentralized platform that enables dapps to access off-chain data and service through APIs, which are well-established standards in software development. API3 offers a streamlined and standardized method for integrating the world's data into blockchain applications through API connectivity.

API3 is offering its own decentralized APIs (dAPIs), which are fully decentralized and compatible with blockchains. dAPIs act as multi-layer, cross-platform oracle solutions and can be bridged to support any blockchain.

API3's dAPIs gather data directly from first-party data providers, thus enhancing transparency, reducing the risk of third-party data manipulation, and eliminating the involvement of rent-seeking intermediaries. This increases revenue for API providers.

This unique structure sets API3 apart from other blockchain data oracle projects (including Chainlink), which often employ their own nodes as intermediaries to deliver data from external APIs to the requesting smart contracts.

Thanks to this unique model, API3 has the chance to compete with Chainlink in the long term. Today, API3 is a $125 million market. Its token price is at $1.57.

Investor Takeaway

Oracles provide key infrastructure to blockchains. Their functionality ensures the market is future-proof. Investors might want to take advantage of exposure to blockchain oracle protocols considering the high demand for the technology.

While LINK still dominates the oracle space, other players can succeed. For example, API3’s unique model may propel it to the top. Smaller players also have more room to grow from their current sizes. This could help provide better returns. Besides the protocols listed above, Universal Market Access (UMA) is another interesting opportunity to watch.

ICYMI