Blockchains really only know themselves.
That’s what blockchains are good at: knowing the current state of assets held by all the blockhain’s users with confidence grounded in cryptographic verifiability.
“[Blockchains] don’t have the ability to speak to the outside world, so they aren’t able to incorporate that into their logic and their contracts,” Kanav Kariya, a strategy director at Jump Trading, an algorithmic and high frequency trading firm, told The Defiant.
So, they need oracles. Oracles collect data outside the blockchain, and feed that information back onto it in a way that the data can be used.
Oracles are essential to decentralized finance (DeFi), so the fact that leading oracle projects are expanding their territory to a new blockchain, Solana, could be taken as a good sign for DeFi growing soon within that ecosystem. Right now, much of the industry attention is on Solana, the proof-of-stake chain that runs with extremely fast block times. It’s the sixth largest blockchain by market capitalization, according to CoinMarketCap, despite only launching its mainnet in March 2020.
“Solana is hot for developers right now, there are some trust assumptions with the degree of decentralization, but so far it’s been amazing to see the ecosystem grow,” Kevin Lu, from the business development team at Band Protocol, an oracle startup, told The Defiant.
Bitcoin and Ethereum are the only two truly indispensable blockchains. It remains to be seen if a third will join that list, but at the moment it seems that the chain led by Qualcomm alum, Anatoly Yakovenko, is a good candidate.
Of course it’s not the only one. “AVA kind of came out of nowhere. Polkadot is someday, but Solana has had consistent growth in dev activity,” Lu said.
Oracles bring off-chain data on-chain. These days, oracles are mostly bringing up to date price data for different assets by collecting up to the second prices from across the market and feeding that to the blockchain that needs it. In the future, these tools could also provide other kinds of data, such as election outcomes or rainfall or flight arrival times.
In true blockchain fashion, it’s important that oracles are decentralized, with lots of nodes collecting observations and feeding those into the network.
If someone can reliably manipulate oracle prices, it’s just like knowing the future: They could tamper with the truth and trade against it for enormous profits. $24.5M was stolen from xToken in May using oracle manipulation, as just one example.
The more participants there are in an oracle network, however, the harder it becomes to manipulate outcomes.
Oracles are essential to decentralized finance. If, for example, a lender is making a loan such that the collateral must have a value some percentage greater than the loan it enabled then oracles are needed to constantly monitor and make sure that the price of the collateral hasn’t fallen too low. That’s just one example, but nearly every DeFi application needs some kind of external data and that’s what oracles provide.
So for Solana’s DeFi community, things are looking good, since a number of oracles are either live on Solana now or are ready on its devnet testing ground. For instance, Band Protocol is live on Solana’s devnet and is just waiting for a partner to launch to mainnet with. And Flux Network, which is currently deployed on Near, is exploring moving to Solana soon, according to Niteesh Settypalli, from the team.
Band is built on a Tendermint-based chain that’s designed to be blockchain agnostic. Flux is designed with economic guarantees of oracle data built in.
“Solana is a large target market for all oracles,” Lu confirmed, predicting that this would only heat up more once Ethereum Virtual Machine capabilities have been deployed on the network.
Lu explained over Telegram that it is awaiting a partner to launch with so that it won’t needlessly waste gas fees before providing services. Further, any partner is going to require customization. “Lots of nuance but we usually only have the oracles live on Mainnet with a dedicated partner to begin with when they’re ready,” Lu said.
Chainlink, the company currently considered the leading oracle provider in crypto, announced on Aug. 25 that it had moved its price feeds from devnet and onto Solana’s main network.
It did not, at the time, announce partners for its data. Nate McCord, a product manager for blockchain integrations at Chainlink Labs, told The Defiant, via a spokesperson. “We received plenty of inbound interest from DeFi developers seeking to build with Chainlink oracle networks on the Solana blockchain.”
McCord further explained that because Solana is a custom blockchain, it requires custom deployments and security audits following going live.
Pyth Comes Alive
“Integrating Chainlink natively into the Solana blockchain can significantly increase the rate at which Solana developers can build secure, high-throughput DeFi applications by providing them with direct access to reliable off-chain data and computation,” Anatoly Yakovenko, CEO of Solana Labs, said in a press release about the launch.
Pyth is also newly live on Solana mainnet, but, unlike the others, it started there.
“Pyth is built on Solana in our view because Pyth is a fast oracle and a fast oracle needs a fast blockchain,” Jump Trading’s Kariya said.
Kariya explained that an extremely fast blockchain is needed to run very fine-grained oracles like the one Pyth aims to provide. He said that a simple oracle takes multiple price feeds and simply averages them. Pyth goes further and handicaps each feed with a confidence interval, making for a much more complex calculation that all needs to happen on chain extremely quickly.
“Solana allows for this more performant aggregation at a fairly fine resolution,” Kariya said. It’s currently running price feeds on Solana for both crypto and equities.
Pyth’s structure is also compelling. It’s a collaboration between many major market players in crypto trading, market making and liquidity provision, such as CMS, FTX, Coinshares, Jane Street, Cumberland, Genesis, Susquehanna International Group and Jump Trading, which incubated the project.
Most collaborators on the project are pushing data to Pyth so it can have the most complete market picture possible, which can be used by developers. While Pyth began on Solana, it will use Solana’s Wormhole bridge to move onto other chains.
“Solana serves for a base denominator that then allows for distribution to other chains,” Kariya said.
In Kariya’s view, such high fidelity data is in the broad interest of everyone in DeFi. The basic measure of health for any DeFi project is its total value locked; that is, how much have liquidity providers (LPs) entrusted to the protocol as they seek yield? These protocols are at a loss without LPs.High quality data computed at high speed protects liquidity providers (LPs) from arbitrageurs, Kariya explained, who can take advantage of tiny discrepancies in the market. When they do that, LPs lose.
As good as the past year has been for Solana, however, it’s not the only blockchain to watch as the next home for DeFi.
“Solana has had great success this year overall no doubt. I think Avalanche is hot on their tail with the recent public incentives,” Lu said.
Disclosure: This reporter holds a small amount of SOL.