The Art of Oracle War

After a long deployment dating back to the blocksize wars and lasting years through the early Layer One wars, we believe the ChainLink empire and its beleaguered marines are vulnerable. The first sign of vulnerability was the sacking of Solana by an emergent high performant army from Pyth. ChainLink had ignored the resource rich territory in favor of staying home in EVM land. The second sign was RedStone’s conquer of the Liquid Restaking (LRT) sector. Now Chainlink is being challenged in its EVM birthplace by a cadre of upstart Oracles utilizing various methods to capture emerging market share and steal from Chainlink. 

‍The Oracle Wars have Begun.   ‍

In this piece, we’ll discuss why after a period of peace we believe the Oracle Wars are only just beginning, ChainLink’s vulnerability, and how upstart oracles like RedStone (Lattice Portfolio Co), Pyth, and more have seized the opportunity to capture market share from Chainlink.

‍What’s at Stake? 

Before we get into the meat of this piece, we want to discuss why we are interested in Oracles and why we believe they will become increasingly important for our industry. Oracles are fascinating because they are one of the earliest examples of entirely onchain businesses that were born out of challenges created by blockchain technology (more below). While many applications in crypto take an offchain business and bring it on chain in some enhanced capacity e.g. DePIN and DeFi, oracles like staking are truly crypto native.  

There are two reasons that we believe the Oracle market will become increasingly important.

- Real World Asset (RWA): As the world of commerce and finance moves increasingly onchain, the need for data feeds for offchain businesses and asset data feeds will only continue to grow. 2023 has seen a resurgence in interest in RWA with TVL into RWA protocols reaching $8B+. With traditional finance firms like Blackrock coming on chain with BUIDL and stating their interest in tokenizing their broader $10T in AUM, the demand for oracles to service these markets will experience rapid growth. 

- Oracle Extractable Value (OEV): OEV is one of the latest crypto acronym du jour referring to a subset of maximal extractable value (MEV) related to oracle price feed updates. Oracles bring offchain data to smart contracts but dislocations between the offchain data and onchain state can occur presenting an opportunity for arbitrageurs and searchers to capture the value of the price discrepancy which constitutes OEV. 

The issue is that OEV is a tax from an inefficient design and is captured by 3rd parties to the detriment of users. The use of bots to increases transaction costs by increasing gas fees for real users. While Oracles create the problem to a degree, they are also stepping in to mitigate it by proposing various designs for aggregated order flow auctions. With order flow auctions, applications can auction their orderflow MEV bots for example. The proceeds of the auction can be redistributed to users or added to the treasury, Oracles can also take a fee for running the auction. 

Oracle Kingdoms

The Oracle problem was identified nine years ago in a Reddit post even before Ethereum went live. In one of the first known mentions of the term, the thoughtful redditor shared their concerns regarding challenges of maintaining a trustless system when there is a need for the blockchain world to know about the physical world without relying on a centralized intermediary.

To address the problem Chainlink was founded in 2017 by Sergey Nazarov and Steve Ellis. Their whitepaper, titled "ChainLink: A Decentralized Oracle Network" quickly gained notoriety leading to a successful ICO in November of 2017 raising $32M. The oracle went live in the fabled Crypto winter of 2019, immediately capturing the rapidly expanding DeFi territory and becoming the foremost decentralized oracle empire with nearly 70% market share by summer 2021. It fended off insurrections by armies from Band, DIA, API3 and UMA and since then has expanded its empire beyond Oracles to cross-chain messaging, Verifiable Random Function, Keepers, and more.  

Chainlink’s rise through the crypto winter of 2019-2020 and market dominance quickly made it the preferred crypto partner. Chainlink invented the “partnership playbook” annnouncing over 100 partnerships in 2020 as the price of $LINK rose over 600%. 

Partnering with Chainlink had a similar effect to a projects token price as a Coinbase listing and teams lined up to align themselves with the empire. ChainLink's commitment to delivering authentic and reliable data combined with its loyal marines solidified its status as the go-to oracle provider in all the crypto land. However as crypto has matured and expanded, Chainlink’s model and agility in the market has left it open to attack.  

Sun Tzu, not to be confused with Su Zhu, was a military strategist that lived from 770-256 and wrote his seminal text on the various aspects of warefare, strategy, and tactics - Oracle founders have taken note.  

“Speed is the essence of war. Take advantage of the enemy's unpreparedness; travel by unexpected routes and strike him where he has taken no precautions." 

‍“Speed is the essence of war”

Humans have an infinite demand for speed and the blockchain industry is no exception. Billions of dollars have been invested into crypto projects that make our crypto transactions blazingly fast and crypto natives are becoming increasingly impatient with clunky experiences, this is manifesting at the middleware layer in addition to the base L1s. Let’s take a look at it. 

Chainlink was founded leveraging a ‘push-based’ model whereby an off-chain process is run and then transactions are sent to update the price into the onchain storage of a given chain like Ethereum. As one would imagine, consistently pushing data onchain is extremely costly, not scalable and has led Chainlink to make a number of product decisions to mitigate onchain fees. The core sacrafice is that Chainlink’s price updates are mostly infrequent, perhaps pushing only 1-2  times/day. This arrangement was acceptable during Defi summer 2020 but as Defi has evolved and in particular with the proliferation of perpetual exchanges and other use cases which demand more frequent updates, it became clear that Chainlink’s model would not suffice all protocols.  

To fill that gap, ‘pull-based’ models were introduced by RedStone, Pyth, and Stork (also Lattice Port Co) in 2021. In the pull-based model, the oracle uses an off-chain, decentralized feed giving protocols the ability to perform initial processing off-chain, and elect to only pull on-chain the price updates that are relevant when there’s user interaction to trigger the update. The pull based model is more gas efficient and lower latency and have become the preferred fit for low latency defi applications like Perp Dexes and prime brokerage protocols. For instance, perp exchanges like Vertex on Arbitrum and ApeX have adopted Stork, Solana perps chose Pyth and protocols like DeltaPrime and Gearbox chose RedStone. It should be noted that Chainlink also recognized the need for a low latency offering and introduced its own pull based product ‘Data Streams’ in Oct 2023. However, 1.5 years later it it is still available only on Arbitrum for 20 assets. 

“Take advantage of the enemy's unpreparedness”

Chainlink’s push based model is presenting problems not only because of its slower speed and higher costs but because it makes it significantly more challenging for them to expand to new ecosystems quickly. With the proliferation of L2s over the past year and the continued trend given Ethereum’s scaling roadmap, Chainlink finds itself unprepared.  

For Chainlink to expand to a new L2 territory, it requires significant costs to be incurred by the oracle giant since they will need to continuously push data onchain regardless of the activity on the L2. In order to commit to a new ecosystem, it is rumored that Chainlink is demanding tribute in the millions but emergent L2s are increasingly not bending the knee to pay the tax and instead are looking for alternative solutions that are cheaper and faster to support. 

To fill the void, RedStone has stepped in with its Push model, compatible with the design of Compound, Aave, Morpho and other blue chip protocols. Today, RedStone operates on over 60 blockchains in the Pull model and 23 chains in the Push model contrasted with Chainlinks 17. 

As of July 2024 RedStone is utilized by Pendle, Morpho, Venus, Fraxlend, Etherfi and 100+ other clients. RedStone's novel oracle schema, known for its EVM compatibility, cements its role as an indispensable ally for the rapidly expanding rollup ecosystem. The agility and efficiency of RedStone not only meet but exceed the emerging market's requirements, setting the stage for a significant market reshuffle with RedStone leading the charge. 

RedStone has rapidly established a formidable presence in the oracle space, directly challenging ChainLink's previously impenetrable dominance. The agility and strategic positioning of RedStone have made it a key player in enhancing the liquidity and accessibility of LSTs and LRTs. The LST and LRT space is arguably the most important sector of Defi and RedStone identified this in April 2023 and heavily invested in conquering the territory leading to major clients choosing RedStone including StakeStone, StakeWise, Stader and the LRT category Etherfi, Renzo, Puffer, KelpDAO and Swell.

“Travel by unexpected routes and strike him where he has taken no precautions”

Not as frequently discussed but very meaningful with regard to Chainlink’s moat is the impact of EigenLayer. In the current state, an Ethereum dApp interfaces with various middleware including oracles. A malicious attacker need only corrupt one of the middleware layers to cause harm to the network. Since launching in 2019, application developers have been able to trust the price feeds from Chainlink given the economic security afforded by the large market cap from Chainlink stakers.  

With EigenLayer and restaking, emergent Oracles can borrow the security guarantees of Ethereum, ensuring dapp developers that price feeds are not manipulated. This strikes to the heart of one of Chainlinks key strengths and introduces another vector of attack on Chainlink’s market dominance. One way of approaching the use of EigenLayer is utilizing the current stack with no slashing implemented and striving for first production clients - the path chosen by eOracle. The other way, chosen by RedStone, is to keep expanding the client base and TVS with the product that is ready to consume restaked value when EigenLayer matures as the platform. As of July 2024, RedStone finishes alpha version of its AVS in cooperation with Othentic, that will be enshrined into RedStone’s modular architecture when stable. 

Preparing for War

It has been a relatively peaceful period in the Oracle Kingdom but the evolving market landscape is creating new opportunities. Over the past several years, Chainlink’s market share has declined from over 70% to now closer to 45%. With the demand for speed from performant defi apps on chains like Solana or L2s we are seeing the advantages of leveraging a pull based model and speed to support more exotic assets. The proliferation of L2s within the ecosystem and in particular the LRT and LST market has led RedStone to catapult to a top oracle position in terms of number of clients & Total Value Secured. Finally, EigenLayer’s shared security model gives RedStone and upstart oracles equal or even better footing than Chainlink’s security, giving app developers another reason to leave the giant behind. The stakes are high, the Oracle market is one of most valuable in crypto and Chainlink’s increasing vulnerability has teams preparing for war. Not discussed but worth mentioning is Chronicle’s expansion beyond Maker and and the unannounced fundraising rounds that have occured in the past year. With warchests in place and product advantages being formed, the Oracle wars have just begun. 

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