Bitcoin

DeFi protocols in search of trusted data providers raise Oracle-focused tokens

For the crypto enthusiast, the sight of several large-cap tokens that have tripled in value since November 2020 is a healthy sign that a bull cycle is underway.

Aside from the Bitcoin (BTC), Ether (ETH) and Altcoins price breakout, every bull market in the cryptocurrency sector is defined by one or two key themes that act as a driving force for market sentiment.

The 2016-2017 market saw ICOs, the growing popularity of collectibles like CryptoKitties, and the widespread belief that blockchain technology is a solution to all of the world’s problems.

DeFi protocols in search of trusted data providers raise Oracle-focused tokens
DeFi protocols in search of trusted data providers raise Oracle-focused tokens

In 2021, it is clear that DeFi is one of the main reasons behind the current upward trend in the price of ether and the altcoins that have hit the sector. Oracle development is another component that is quietly building the essential infrastructure of the cryptocurrency market, and many of the projects that focus on oracle integration have seen the price of their tokens spike over the past 12 years. Months.

The oracles track, record and securely transmit various types of data such as price, trading volume to various blockchain networks and entities interested in the data provided.

Companies like stablecoin provider Paxos, decentralized exchanges (DEX) like Uniswap, and lending platforms like Maker (MKR) use oracles like Chainlink (LINK) to get accurate information on cryptocurrencies.

Total value locked in DeFi. Source: DeFi Lama

The need for truthful and reliable data is becoming increasingly important as the DeFi ecosystem continues to grow and the total locked down value hits record highs on many platforms.

DeFi hacks show the growing need for oracles

In 2020, various DeFi protocols were hacked, costing investors millions of dollars when unchecked code bugs allowed hackers to get away with price changes.

These attacks highlighted the essential tasks of oracle providers to provide reliable identification data up to the second price for cryptocurrencies. Having this data drawn from multiple reliable sources reduces the possibility of massive tampering and liquidation events like the Harvest Finance exploit, in which malicious actors were able to steal $ 24 million by priceing various stable coins on the DAO (CRV) curve – Manipulated platform.

Universal consistency, or even synchronization, of prices and data sources is one of the best ways to address this problem because currently every oracle is structured differently in the way it receives data, reaches consensus about that data, and how prices are calculated become.

With the price of Bitcoin consistently reaching new highs and DeFi’s market cap surpassing $ 57.45 billion, mainstream financial investors are becoming increasingly interested in cryptocurrencies and pricing solutions are needed.

These are some of the best oracle-oriented projects whose tokens have made big gains in the past few months.

Chainlink has the advantage of being the first

The best known and most established oracle project is Chainlink. As a result of the ICO craze of 2017-2018, the project, led by Sergey Nazarov, initially raised $ 32 million to build a decentralized oracle network made up of node operators willing to give smart contracts access to external data sources in return. a reward in the form of the native cryptocurrency LINK.

LINK / USDT daily chart. Source: TradingView

LINK has become synonymous with DeFi as many of the price sources that connect separate blockchains and decentralized exchanges use their price oracles for pricing.

As with the Coinbase effect, there was a time span when the mere mention of the integration in Chainlink resulted in a brief period of price hike as it was seen as a stamp of legitimacy.

On March 16, 2020, shortly after the global financial markets were rocked by the rise of COVID-19, LINK was trading at just $ 1.63 after trading at $ 4.80 two days earlier.

Since then, LINK’s price has soared to its all-time high of $ 35.69 on January 23, in large part due to the addition of LINK liquidity pools at Uniswap in DeFi summer 2020.

The tape protocol provides data transfers between chains

Band Protocol (BAND) is a cross-chain data oracle originally launched as an ERC-20 token in September 2019, but migrated to the Cosmos network in June 2020 with the release of Band 2.0.

The project specializes in the aggregation of real data and APIs. The protocol then makes this data available for on-chain applications and smart contracts to facilitate the exchange of information between on-chain and off-chain data sources.

In 2020, the price of BAND soared from $ 1.09 to a high of $ 17.51 ​​in August 2020 before correcting below $ 10. Currently, BAND is trading at $ 15.90 and on February 13, the altcoin hit a new high of $ 20.62.

Daily chart of the BAND / USDT pair. Source: TradingView

Like LINK, the BAND token is used as security by validators meeting data requirements and is the main exchange medium within the BandChain ecosystem. The oracle nodes in the chain are also involved in the block production / validation process, adding a second role to the important data forwarding function.

In terms of what sets BAND apart from other oracle solutions, this is where the decision to evolve in the cosmos comes into play.

Currently, the Cosmos team is developing the IBC (Inter Blockchain Communication) protocol, which BAND will use for cross-chain data transfers to support interoperability between blockchains.

Once developed, the protocol can ensure a reliable data feed across multiple blockchains while also making it easy to create oracles without authorization that anyone can use to process data requests.

API3 brings the governance of a DAO to the realm of oracles

One of the newbies to the price oracle game is API3, a project led by a DAO that focuses on creating fully decentralized native blockchain APIs (dAPIs). These dAPIs aggregate data from proprietary oracles which, according to the API3 homepage, “are operated by some of the world’s leading API providers”.

API3 sees oracles as a kind of middleware positioned between APIs and smart contracts, resulting in higher costs and centralization. The project’s solution is to decentralize this process by allowing API providers to run their own nodes, so smart contracts can connect directly to APIs to get the latest data.

Investors’ desire to play a role in guiding blockchain projects has also become one of the most common topics in the current bull market, and API3 aims to capitalize on this trend.

The API3 token in combination with the DAO offers token holders the opportunity to participate in the control of the ecosystem by blocking tokens in the data feed insurance pool. In addition to being able to vote on suggestions, participants have access to weekly rewards for their service.

4-hour chart of the API3 / USDT pair. Source: TradingView

Since the distribution of public tokens in early December 2020, the price of API3 has increased 416%, from $ 1.56 on December 31st to a high of $ 7.86 on February 13th.

DIA focuses on oracles for DeFi

The DIA (Decentralized Information Asset) platform, which advertises itself as an “open source data and oracle platform for the DeFi ecosystem,” pulls and gathers data directly from cryptocurrency exchange APIs and other public sources on DIA servers then passed to the chain from a database.

DIA data streams are available through oracles or APIs provided by protocols from DeFi and other data providers with plug-and-play access.

Finally, the DIA token will have staking and governance functions that will be used to control data collection and evaluation. The overall goal of the project is to become a reliable source of immutable and verifiable data for any market or asset associated with financial institutions.

4-hour chart of the DIA / USDT pair. Source: TradingView

DIA was launched in early August 2020 at the end of the DeFi ecosystem’s first bull market. DIA got off to a quick start, rising from a low of $ 0.80 on August 3rd to an all-time high of $ 5.13 on September 2nd.

DIA is currently trading at $ 2.79 after falling from its monthly high of $ 3.43

UMA uses “No Price” derivatives to create financial contracts on Ethereum

Universal Market Access (UMA) treats oracles very differently from other projects in space. Your pricing is done through a library of synthetic assets. All price disputes arise from registered financial contracts managed by an optimistic oracle service called the Data Verification Mechanism (DVM).

UMA enables users to design and create self-executing and self-enforcing financial contracts on the Ethereum blockchain that are backed by financial incentives. According to the project website, these “no-price” derivatives are intended to “ensure adequate collateral from counterparties without using an on-chain pricing feed.”

If a price dispute arises for a financial contract registered on the platform, the holders of UMA tokens vote on the value of a price identifier using the optimistic oracle service from DVM at a historical time stamp. Token holders who take part in the validation process receive rewards in the form of UMA tokens from the requesting party.

The UMA token is also the governance token of the Universal Market Access Protocol, with which token holders can vote on changes to the protocol parameters and system updates.

Daily chart of the UMA / USDT pair. Source: TradingView

In early February, the UMA price rose 300% from $ 300.0 on February 1st to a new all-time high of $ 44.15 on February 4th. Since hitting this new high, UMA price has corrected dramatically to $ 25 as traders took their profits after the strong three-digit breakout.

Cryptocurrency investors who are solely focused on profits should look beyond gross price action through technical analysis and look out for value-adding projects as these are typically the most profitable.

Oracles are a fundamental infrastructure for the growing DeFi ecosystem and add value through their potential for staking, governance, and liquidity pools by improving the interoperability of isolated blockchain networks.

The views and opinions expressed are those of the author only and do not necessarily reflect the views of Cointelegraph.com. Every investment and business move is associated with risks. You must do your own research when making a decision.

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