Oracles: Revenue and Tokenomics
Key takeaways:
- The typical revenue model involves validators setting a fee for a data request to cover their gas and maintenance costs, while users pay for each request. Validators use the platform’s token as collateral, and the protocol selects the validator with the most staked tokens to fulfill the request. As a result, fees represent most of the protocol’s revenue, while demand for the utility token creates upward pressure on its price. Oracle protocols also receive grants from foundations and compensation from Web2 organizations for integrations and consulting services.
- Monetizing oracle platforms can be challenging. Popular platforms do not disclose their profits, but it is believed that most of their revenue is distributed to node operators and token holders through node incentives and staking rewards. While Chainlink is not viewed as a for-profit project, it likely generates revenue through partnerships and integrations with its commercial entity, SmartContract Chainlink. However, specific revenue figures are not publicly available.
- Attracting a partner is likely to be a better option from the standpoints of market saturation and development complexity. There are various partnership options, including partnerships between entire networks or individual projects and an oracle provider, collaborations between foundations and oracle providers, running a node in exchange for the oracle provider’s decentralized services, or the participation of individual projects, such as DEXs or DeFi protocols, in the oracle provider’s acceleration programs.
- Building our own TON oracle is the preferred option if our objective involves exploring business models such as data marketplaces for individuals and organizations within the TON ecosystem. By relying on a TON-based oracle, we can ensure that TON captures all of the economic benefits generated by data requests.
Oracles play a crucial role in facilitating the operation of smart contracts and dApps by granting them access to external data and enabling interaction with the real world. By bridging the gap between on-chain and off-chain information, oracles supply blockchains with market prices, real-world events, and other data inputs necessary for the automated execution of smart contracts.
They are particularly significant within DeFi applications, where accurate price feeds and financial data are essential. Oracles enhance security, enable interoperability with external systems, and play a pivotal role in expanding the functionality and trustworthiness of blockchain applications. It is important to carefully select reliable and decentralized oracle solutions to ensure the data’s integrity and accuracy.
The utility of oracles extends far beyond the Web3 world. For example, Chainlink currently has more than 77 use cases across DeFi, NFT, gaming, randomness, insurance, enterprise systems, supply chain, utilities, authorization and identity, government services, sustainability, and off-chain computation (source).
While acknowledging the undeniable utility of oracles, there is an ongoing debate surrounding their viability as an investment. This report aims to examine the fundamentals behind the oracle provider revenue and token price dynamics. Additionally, it provides recommendations for potential strategies that TON can adopt to integrate an oracle into its network.
Earning Revenue: Insights From Chainlink
As a rule, the organizations responsible for oracles are not transparent about the revenue models and figures of their protocols. Chainlink stands out as having the most publicly available information regarding its revenue and cost structure.
The main sources of revenue are:
- dApp fees. They are claimed to be the primary revenue source for Chainlink. Chainlink has gained significant traction and is widely recognized as the leading provider of price feed services across various Web3 sectors, particularly in DeFi. When it comes to data feeds in a decentralized web, Chainlink is “top-of-mind”, securing 312 DeFi protocols listed in DeFiLlama, while the second most adopted oracle has only 86. With the website mentioning a total of 688 DeFi protocols (source), it is likely that the fees paid by developers in LINK tokens serve as a major source of revenue.
- Partnerships with enterprises. Enterprises provide compensation to Chainlink for the integrations and consulting services they receive. These operations are executed through Smartcontract Chainlink, Chainlink’s parent company, which acts as a commercial entity. Smartcontract Chainlink interacts with a variety of Web2 organizations involved in sectors such as AI, insurance, real estate, e-commerce, healthcare, and digital marketing (source).
- Token gains. There are speculations that the Chainlink team may have been selling off some of its LINK tokens. ****The continuous upward pressure on the price can be attributed to the fact that all Chainlink users have to purchase LINK in order to pay for the services provided. Node operators also need to purchase LINK tokens as the competition for jobs is determined by the amount of LINK they stake (source).
- Grants. Third parties provide grants or incentives to bolster specific chains or enhance the functionality of existing infrastructure, networks, or protocols.
Costs include:
- Gas fees. Chainlink facilitates direct data updates to the blockchain, which entails shouldering the expenses associated with submitting transactions. Among these costs, gas fees are expected to be a significant component within Chainlink’s business model.
- Payouts to node operators. Node operators, the entities responsible for managing the hardware and software infrastructure supporting each Chainlink network, receive node revenue from the user fee pool (as depicted in the figure below). These include Community Nodes (such as Link River, Mycelium, LinkPool), DevOps Nodes (Blockdaemon, Infura), and Enterprise Nodes (LexisNexis, Swisscom) (source).
- Staking rewards. As illustrated in the figure below, fees generated by dApps are allocated not only to node operators but also to stakers who do not act as validators. These stakers are compensated for the crypto-economic security they provide.
- Grants for blockchain developers. Chainlink operates the Chainlink Community Grant Program through which it provides grants to support various projects. The program offers financial assistance, technical guidance, and resources to recipients. The selection process considers a project’s potential impact, technical feasibility, and alignment with the goals and values of the Chainlink ecosystem (source).
The value creation and sharing process among node operators, dApps, and stakers is illustrated in the chart provided by the Chainlink Blog:
We do not know the actual profitability of the platform itself. It is conceivable that Chainlink distributes all of its revenue to node operators and stakers, while sustaining and advancing the platform through grants, compensation from third parties, and token gains.
As of the most recent available data, the weekly LINK rewards amounted to 740.18K LINK, or ~$4.89M. Notably, Chainlink spent $1.92M on gas fees:
LINK rewards, 27.04.23–27.05.23
Gas fees, 27.04.23–27.05.23, USD
Node operators implement their own revenue models, deciding the amount they charge for their services in LINK tokens themselves. These fees are set in order to cover the expenses incurred for gas and maintenance. The individual Chainlink networks are known to be profitable based on fees alone, unlike other networks that also rely on block rewards (source).
Alternative Oracle Platforms
While Chainlink occupies almost 50% of the whole DeFi segment, there are other notable players such as Chronicle and WINkLink. The rest of the market is distributed between smaller players.
BAND Protocol
Band Protocol is a cross-chain data oracle platform that connects real-world data and APIs to smart contracts. It was initially launched on Ethereum in 2017 and subsequently migrated to Cosmos in 2018. Currently, Band Protocol provides data feeds through its own public chain known as BandChain.
Similar to Chainlink, each data source sets its own fee, while users set a fee limit. Node operators provide collateral in BAND, which is also used as a gas token in the network. Each time a request is initiated, the protocol selects the validators with the most staked BAND to fulfill it. Validators earn both the block reward in the form of newly-minted BAND and a fee that they previously set. Additionally, a portion of the block rewards is allocated to the community fund pool (source).
To gain access to premium data sources, users are required to pay additional fees for each specific request made to the oracle. The total fee amount per oracle request is determined by adding up the individual data source fees associated with the requested oracle script and then multiplying it by the number of requested validators (source).
Users can also stake BAND tokens to receive rewards without becoming validators. In this case they become delegators.
According to CoinMarketCap, BAND is currently the second-largest oracle coin after LINK by market cap.
WINkLink
WINkLink is the first decentralized oracle built on the TRON Network, with a primary focus on DeFi dApps. It offers two main products: price feeds and cryptographically secure randomness (VRF).
Its native utility token, WIN, is used for node incentives and network payments, in a similar way to LINK and BAND.
According to DefiLlama, WINkLink is used by JustLend and JustStables, both of which are TRON-based protocols. Despite securing only 2 protocols, WINkLink ranks third in terms of TVS due to its high adoption rate.
Universal Market Access (UMA)
UMA is a decentralized oracle platform designed specifically for financial contracts. It facilitates the creation and verification of financial contracts for a wide range of decentralized products, including tokenized assets like synthetic crypto or real-world assets.
The verification process works as follows: Users submit a natural language statement along with a bond that serves as a bounty for validators to dispute it. Validators have the option to either accept the statement as true or dispute it, and they earn a reward if their vote aligns with the majority decision.
The UMA token plays a dual role as staked collateral, providing economic guarantees to the oracle, and as a governance token.
Decentralised Information Asset (DIA)
DIA is a non-profit association based in Switzerland that aims to democratize financial data. DIA is primarily meant to be used by DeFi apps.
DIA functions as both a utility and governance token. It is used as a bounty for data needs, for validating data through staking, accessing real-time data streams and APIs, as well as participating in voting processes related to platform development.
Furthermore, DIA enables users to build custom oracles. Currently, the editor includes price feeds for crypto and NFT collections, allowing users to select an asset or collection, a pricing methodology, and a data source from various exchanges (source).
Pyth Network
Pyth Network is mainly focused on price feeds. The protocol involves three parties: publishers, Pyth’s oracle program, and consumers. Publishers submit pricing information to Pyth’s oracle program, which combines the data to produce a single price and confidence interval. Consumers then read the price information produced by the oracle program.
Pyth operates on an on-demand price update model, which means that it doesn’t provide continuous price feed updates. Instead, Pyth delegates the responsibility of updating prices to its network users, who submit transactions to the Pyth contracts in a permissionless manner (source).
Pyth’s oracle program runs on both the Solana mainnet and Pythnet. Solana Price Feeds are available for use by Solana protocols, while Pythnet Price Feeds are accessible on 22+ blockchains. The key component of the system is the oracle program, which aggregates data from each individual publisher. Publishers interact with the program to share their price and confidence, and this information is stored in program accounts. Price aggregation is triggered by the first price update in a slot. The resulting aggregate price is written to the Solana account, making it readable by other on-chain programs and available for transmission to other blockchains (source).
There are currently more than 80 data publishers on the platform, including DEXs, CEXs, liquidity providers, market makers, market data providers, trading firms, and trading infrastructure providers (source). The teams powered by Pyth include TradingView, Synthetix, Venus, Hashflow, Kwenta, Alpaca Finance, Helium, Drift Protocol, Zeta Markets (source).
RedStone
RedStone represents a competitive market where pricing is determined by each Data Provider’s manifest. To access the information, end users pay Data Providers using RedStone tokens.
The company’s website lists various decentralized and centralized exchanges, as well as crypto and TradFi market information sources (such as CoinMarketCap and Yahoo Finance), as Data Providers. These Data Providers stake RedStone tokens as collateral to ensure data quality and maintain their own nodes provided by RedStone.
RedStone uses decentralized storage services powered by Arweave. Unlike Chainlink, RedStone fetches data on-demand instead of continuously updating the feeds every couple of minutes. The data is stored on Arweave and can be retrieved by node operators and partners upon request.
RedStone intends to distribute tokens to early adopters and Data Providers.
The protocols secured by RedStone oracles include Mento, Yield Yak, Pangolin, DeltaPrime, and Moola Market.
Chronicle Protocol
Despite ranking second in terms of TVS, not a lot is known about Chronicle. It secures only two protocols compared to Chainlink’s 312, with MakerDAO being one of them and making up most of Chronicle’s TVS.
Chronicle Labs is funded by MakerDAO and is most likely designed to be an internal solution for the MakerDAO ecosystem, rather than for mass adoption.
Are oracles attractive from an investment perspective?
None of the popular oracle platforms disclose their profitability, but there are several factors that contribute to the sustainability and growth potential of their tokens. These conditions include:
- Native token is used as a gas token. The incentive to purchase a token in order to pay for decentralized services puts upward pressure on its price. The anticipation of increased demand for these services also drives the price higher.
- Node operators must provide token collateral to compete for jobs. This mechanism drives demand for the token, particularly as the likelihood of securing a job is determined by the amount of collateral. The node operators are incentivized to hold the token as long as the fees and rewards are sufficient to cover gas and maintenance fees.
- Node operators are not incentivized to immediately sell off tokens after receiving them. The expectation of future user demand motivates them to consistently increase their amount of collateral to compete for jobs.
- Token holders receive a fraction of the fees generated by dApps. While the previous points guarantee a continuous upward pressure on the token’s price due to its utility, the rewards for holders provide an incentive to continue holding even if the price is in a neutral dynamic. The sharing of the fee pool can be managed through staking. Unless holders receive rewards, all they benefit from is token inflation, while all the other benefits are distributed to node operators.
Another issue to consider is whether alternative oracle platforms can compete with Chainlink. As previously mentioned, Chainlink currently outperforms all of its competitors in terms of adoption, particularly in the realm of real-world data. Nowadays, Chainlink is widely regarded as a technology rather than just a project. According to CoinMarketCap, Chainlink’s market cap constitutes 77% of the total oracle coin market cap. Even Band Protocol stands at only $180M compared to Chainlink’s $3.3B. This suggests that there are significant barriers for new oracles to enter the market and retain market share. One such barrier is Chainlink’s established reputation, which creates a disincentive for data providers to switch to alternative oracles.
At the same tine, specific oracles have gained considerable traction in particular niches. For example, Synthetix, a leading synthetic assets liquidity protocol and one of the highest revenue-generating protocols in the decentralized space, recently replaced Chainlink by adopting Pyth’s on-demand model. As a result, a substantial number of DEXs that offer synthetic asset trading now rely on Pyth as their primary oracle provider. In certain instances, these platforms employ a hybrid oracle model that combines both Pyth and Chainlink.
In certain instances, oracles are specifically developed to offer data feeds exclusively to protocols within a single blockchain or even to just a single protocol (such as WINkLink for TRON or Chronicle for MakerDAO). This approach inherently restricts the potential revenue of the protocol and the market cap of its associated token.
It is relatively rare for oracle tokens to experience significant price rallies independent of the overall market conditions. However, RLC (iExec RLC), which currently has the fourth-largest oracle token market cap according to CoinMarketCap, stands out as one of the few oracle tokens that has shown a somewhat positive price trend since the market bottomed out in November 2022.
RLC, 20.11.22–01.06.23
RLC, apart from providing oracles, offers a variety of resources that includes computing power, datasets, and applications. iExec, being part of the Intel AI ecosystem, also provides a service called “Renting AI Models.” This may explain the price dynamics observed above, since several AI coins, such as GRT (The Graph) and Render Token (RNDR), rallied in early 2023. The iExec’s Oracle Factory is an integral part of its primary decentralized computing service. Powered by iExec’s Trusted Computing Environment (TCE), Oracle Factory uses hardware enclaves to process data. Notably, Oracle Factory stands out by addressing the demand for custom oracles instead of solely relying on pre-existing ones.
During the same time period, all the other tokens mentioned in this report were either consolidating or drifting to new lows. This suggests that even oracle projects with solid fundamentals (such as LINK, BAND or UMA) are, at best, having a neutral impact on their prices. Nevertheless, the holders of these tokens still benefit by receiving a portion of the value generated by the protocols through staking rewards.
Therefore, while the robust fundamentals of an oracle token can protect holders from continuous downward pressure on price and offer them a share of the network’s generated value, they do not shield the token from overall market downturns, and it is unlikely that it would rally independently of the wider market.
Implications for TON
Before proceeding with the development of our own oracle, there are several questions that need to be answered.
What is the market profile?
There are lending protocols (Tonpound, EVAA Finance) and AMMs (STON.fi, Megaton Finance, DeDust.io) that would benefit from a reliable price feed. While these protocols already have their own price feeds, it is generally recommended to utilize multiple oracle sources to mitigate the risks associated with manipulated or missing data in a single price oracle, which could potentially cause serious malfunctions in the entire dApp.
Furthermore, there have been discussions regarding the potential launch of a TON-native stablecoin and a protocol for synthetic assets. These projects would also rely on an external Proof-of-Reserve mechanism to effectively manage the price of collateral.
Is it better to attract a partner or build our own oracle?
Internal research conducted by Whiterabbit suggests that attracting a partner would be beneficial due to the complexity involved in the development process. However, Whiterabbit specifically suggested attracting Chainlink:
Building oracles infrastructure from scratch is complicated because of the high requirements for such a system: it should be decentralized, stable, and sustainable from attacks. Mature oracle systems still suffer from manipulation, which leads to protocol hacks (example one, two, three). So, the best option for TON is to attract Chainlink — the most prominent player with its huge infrastructure and expertise.
“Deep look at the TON ecosystem”, internal research from Whiterabbit
Alternatively, we should consider that a TON-based oracle could support various business models, such as data marketplaces or dynamic NFTs (dNFTs), which would generate fee revenue for TON oracles through continuous data fetching requests.
Although leveraging existing oracle chains (e.g. Chainlink) is a potential tactical option, the unique architecture and capabilities of TON offer the opportunity to deeply integrate oracles within TON itself (even as a custom workchain) and thus bring a competitive advantage to TON Ecosystem.
If oracles are integrated with TON, it will be possible to create a data marketplace and dynamic NFTs where all the economic benefits are captured by TON.
Emanuele Costa, Domain Expert
TON is a good candidate for building a data marketplace, primarily due to the vast amount of data generated by its users that can be harnessed by dApps. Additionally, TON Storage, a decentralized storage network built on TON, could be effectively utilized to create an affordable and highly scalable storage solution for TON users’ data. Consequently, a TON-based data marketplace would not only capitalize on TON’s user base but also offer additional utility and fee revenue for both the oracle and TON Storage.
Each time a user of an app powered by the TON-based oracle generates a request, the fee revenue is allocated to the oracle’s treasury. However, if third-party oracle providers are involved, the economic benefits would be captured by them instead of TON.
A dNFT encompasses various use cases that involve capturing changes in parameters in response to external events and data. For instance, following tokenized real-world assets with fluctuating metrics (like market value for real estate) or reflecting base stats in blockchain-based games (source). Similarly, a TON-based oracle could be employed to deliver data and trigger corresponding changes associated with it.
The decision to build an oracle or seek a partnership hinges on the anticipated protocols and dApps that are expected to emerge on TON in the near future. The primary tradeoff lies in weighing the economic advantages of TON-based projects built upon a TON-based oracle against the convenience offered by a pre-existing solution from a third-party oracle provider.
Are there any alternatives to using oracles on TON?
Whiterabbit also highlighted the option of utilizing a cryptographic signature to parse price feeds from market data sources like Coinbase, which could serve as a temporary solution until a partner is found. Additionally, it was emphasized that having multiple price feed sources, along with oracles, is essential for ensuring data sustainability within the ecosystem.
Attracting a partner can take a significant amount of time. As an intermediate solution, there is an option to implement parsing of price fees with a cryptographic signature (for example, from Coinbase) that will partly solve the oracles problem on the blockchain. It is worth mentioning that Coinbase doesn’t have TON coin listed. Finding the optimal solution for oracles on TON may be the subject of another research.
At the same time, it is essential to understand that connecting an oracle is not a panacea for data sustainability. Given the possible attacks on oracles, it is better to have an additional anchor in the form of an alternative source of price feeds from the most liquid DEXs on TON.
“Deep look at the TON ecosystem”, internal research from Whiterabbit
However, from a long-term perspective, oracles are still crucial because they not only provide the data itself but also offer third-party verification, ensuring the sustainability of data sharing.
Are there any examples of blockchains building their own price oracles that gained widespread adoption?
Chainlink stands out among its competitors in the oracle space in terms of size and generally dominates the industry (source). While some oracles, like WINkLink on TRON and Chronicle on MakerDAO, were specifically designed for certain networks or protocols, there is little evidence to suggest that they have generated significant revenue or achieved substantial market caps for their utility tokens. Nonetheless, these oracles continue to operate within their respective ecosystems.
What barriers will we face?
Chainlink enjoys widespread adoption and is widely recognized for its reliability. Developing a new oracle will likely be a complex and expensive endeavor. It involves the careful acquisition of reliable data providers, the establishment of sophisticated aggregation mechanisms, and the identification of trustworthy node operators.
Can oracles be monetized?
The examples provided in the above report suggest that oracles are not commonly viewed as for-profit ventures. Monetizing oracles can be challenging as a significant proportion of their revenue is typically allocated to node operators and token holders. While a well-designed token economics model and widespread adoption can contribute to sustainable market cap growth, consistent profits are not the norm for oracle platforms.
How can we bring oracles to TON?
There can be several possible integration scenarios:
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