Driving on-chain capital markets: Decentralised oracles

As the crypto sector becomes increasingly intertwined with traditional finance, the demand for reliable real-world data has grown exponentially. This is where decentralised oracles play an important, yet often overlooked, role. With the influx of Wall Street giants like BlackRock entering the crypto space and the rising interest in on-chain financial markets, oracle providers are well-positioned to play a leading role in connecting real-world assets (RWA) to blockchain networks.

What many people forget is that blockchains are isolated from the external world, lacking the inherent ability to fetch information from outside their own ecosystems. This challenge, also known as the blockchain oracle problem, means they are restricted to only using the data that is stored on-chain. This severely limits their operability and hence, why they are dependent on oracles to securely retrieve information from external data sources and feed it into smart contracts and blockchain applications.

As the decentralised finance (DeFi) space grows more complex and intricate, with more traditional financial products and use cases available, the reliance on oracles to move real-time data between applications and networks has only deepened. This is because oracles support a wide range of data types (including asset prices, exchange rates, geolocation and traceability, internet of things (IoT) and more). Here’s an example.

When a perpetual trading protocol needs to liquidate a trader’s highly leveraged position (if his or her collateral falls below the required margin ratio), it is the oracle’s real-time price data that the protocol uses to trigger the liquidation.

Despite their importance, however, oracles are susceptible to data manipulation, which can prove costly for many applications if compromised and may even destabilise protocols. Many oracle solutions are working to address these challenges by integrating a decentralised infrastructure to collect and verify the external data, with the goal of improving things like data integrity, reliability and security of the oracle network itself.

Decentralised oracle networks (DONs)

Unlike centralised oracles that rely on a single source, decentralised oracles use multiple independent nodes and data sources to fetch and validate the information. This ensures the integrity of the data while also reducing any single points of failure. Within these decentralised oracle networks, the data can be cryptographically verified and audited on the blockchain, thereby making the data immutable.

One example is MakerDAO’s DAI Savings rate (DSR), which uses an oracle that provides the data needed to manage the yield distribution to DAI tokenholders. Another is Chainlink’s Proof of Reserve solution, which uses a decentralised oracle network to create automated on-chain data feeds to monitor collateralised assets backed by off-chain reserves – like RWAs or in the case of the ARK 21Shares Bitcoin ETF.  

While decentralised oracles may not enjoy the same level of mainstream attention as Bitcoin and Ethereum, they do play a significant role in meeting the unique data and interoperability demands of the DeFi ecosystem – particularly in the areas of cross-chain communication, decentralised exchanges and money markets, lending and borrowing, staking, and NFTs, among others.

The rise of RWA tokenization and the role of oracles

RWA tokenization is one of the biggest market opportunities in crypto, with the potential to unlock a multi-trillion-dollar market. Even major financial institutions like BlackRock recently launched their tokenized fund BUIDL on the public Ethereum blockchain, while tokenized assets like private credit, cash, commodities and real estate are also growing across blockchain networks. Still, for this to even succeed, reliable data feeds and tracking solutions will be essential.

Industry-standard oracle solutions like Chainlink securely provide smart contracts with transparent information on key data like asset valuations, reserve collateral, fund performance and other critical metrics. This middleware-type role enables these RWAs to leverage the benefits of DeFi, offering users with features such as automated dividend payouts or collateralised lending options.

Take BlackRock’s BUIDL fund as an example. In this case, an oracle continuously feeds the Ethereum smart contracts with real-time data on the underlying Treasury bills and repo agreements, allowing it to accurately reflect the current state of the tokenized fund (e.g., the fund’s assets and yield generated).

But this is just one example of how decentralised oracle networks are supporting the broader tokenization trend. Today, tokenized private credit exceeds USD 7.6 billion, and tokenized treasuries have surpassed USD 1.28 billion, while the total value locked (TVL) across RWA protocols has grown over 60 percent since February. This growth is why several oracle solutions are heavily prioritising their support for RWA tokenization, as the demand for moving capital markets on-chain will require a strong infrastructure capable of providing accurate and reliable real-time market data.

Niki Ariyasinghe, Head of Business Development, Asia-Pacific and Middle East at Chainlink Labs says, “Tokenization is a significant opportunity for reformatting the world’s value and assets into a superior blockchain-based format. By providing data, interoperability, and security to the tokenized asset economy, Chainlink oracles are supporting the convergence of the blockchain ecosystem and traditional capital markets.”

Source: Dune, cryptokoryo

Here are a few decentralised oracle solutions to consider:

  • Chainlink: A leading decentralised computing platform that has enabled over USD 10.5 trillion in transaction value by providing protocols access to real-world data, off-chain computation, and secure cross-chain interoperability across any blockchain. Chainlink works with the majority of leading DeFi teams like Aave and Synthetix and also capital markets institutions such as Swift, DTCC, and ANZ.
  • Pyth Network: A recently launched decentralised oracle provider focusing on high-frequency financial market data. This data includes cryptocurrency prices, foreign exchange rates and commodity prices, directly from over 90 first-party sources like financial institutions, market makers, crypto exchanges and trading firms, such as Nomura’s digital asset subsidiary Laser Digital.
  • UMA Protocol:  An optimistic oracle and dispute arbitration system that brings real-world data onto blockchains, providing data for projects including cross-chain bridges, insurance protocols, custom derivatives, and prediction markets.
  • Stork: A decentralised oracle purpose-built for low latency trading and pricing data to developers, decentralised exchanges, and lending protocols building on Sui’s blockchain.

On the path to product market fit?

Of course, there are still challenges to overcome, but as the merging between crypto and traditional markets accelerates, decentralised oracle networks may emerge as a key catalyst to unlocking the full potential of on-chain capital markets. Without them, the widespread adoption of tokenized RWAs would simply be limited.

By providing a reliable passage between these two worlds, not to mention the escalating data and interoperability demands in the evolving Web3 ecosystem, we could argue that some of these solutions are among the closest in the crypto sector to achieving true product-market fit (if not already).

ENDS

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