Chainlink, Band Protocol, API3, and Umbrella Network: Exploring the Differences Between Oracles
By: Priyeshu Garg
Tags: Umbrella Network Tech, Umbrella, General, Oracle, Defi

Oracles are one of the most pressing problems the DeFi industry currently faces.

With no one-size-fits-all solution available, different oracle services take up different approaches to solving the same set of problems the market faces — having a secure and stable pricing source for cryptocurrency assets as well as real world financial data .

In this post, we explore how some of the biggest and most promising oracle services on the market set out to solve this problem and analyze the difference in approaches they took to get there. There are many oracles out there, we couldn’t cover all of them but we are covering most of the major ones.

Chainlink

Chainlink was one of the first decentralized oracle networks to launch in the crypto industry, paving the way for other services to follow suit and offer an oracle service without a single point of failure.

Chainlink leverages credentialed data sources through its Price Reference Contracts, a collection of over 70 different DeFi price feeds secured by decentralized oracle networks. These networks enable smart contracts to synchronously pull external data with a single transaction. Chainlink’s nodes all have built-in credential management capabilities that allow them to access any password-protected APIs using modular external adapters. This includes free open APIs, paid authenticated APIs, and proprietary private APIs.

It doesn’t include randomness as a core part of its protocol, which gives a high level of flexibility to its users when it comes to choosing nodes and connecting to data.

What makes Chainlink different from other oracle services is the fact that it isn’t a blockchain network. Chainlink nodes therefore only operate as oracles and are focused solely on data delivery. Without the need to spend time and resources on block production and validation, Chainlink’s oracles are lightweight and can be put up and used almost instantly. This also means that an almost unlimited number of oracle networks can operate in parallel and run natively on any blockchain or Layer-2 solution.

Diving even deeper, key prices like DAI/USD are updated by Chainlink only once every 24 hours. Another limitation of Chainlink is that it offers data on only about 80 price-pairs while there are thousands of legitimate cryptocurrencies. The data requirements in the DeFi ecosystem also goes beyond just cryptocurrencies. Data like volatility, stocks, real estate etc. is also needed to connect DeFi with the real world, something that Chainlink currently does not support.

Chainlink also uses KYC for Validator onboarding, taking away the “decentralized” from Decentralized Finance. Chainlink is primarily built on Ethereum and projects must take additional measures like back doors and extra layers to use Chainlink oracles if they are not on Ethereum. Chainlink currently uses PoA which is considered centralized in nature since the validation selection is arbitrary in nature.

API3

API3 is an oracle service that set out to create a new generation of blockchain-native, decentralized APIs. The protocol believes that the biggest problems decentralized applications face isn’t the lack of an oracle interface, but rather access to Web APIs.

Instead of utilizing a third-party oracle principle, the protocol sets out to use first-party oracles, which are oracles operated by the API providers themselves. These first-party oracles provide responses which are aggregated into on-chain data feeds, called decentralized APIs, or dAPIs for short.

API providers dispense data for on-chain dAPIs via Airnode, the first-party oracle node, and are compensated periodically at fixed rates, usually in stablecoins. API3 also enables API providers to get paid out in fiat currencies through a DAO-approved grant.

Instead of having oracle-level staking, API3 has a staking pool where anyone holding API3 can delegate to in return for a say in the protocol’s governance. Staking was introduced to provide a financial incentive for users to participate in API3 — the collateral provided by users enables everyone to share both the operational risk of running the protocol and incentivize them to minimize it.

API3 has a form open for those who wish to develop on top of API3 to request data pairs and for data providers to become API providers. The data pairs are unknown and the platform is not live yet. The product theoretically promises low costs and high scalability — but whether the economic incentives will align with the built version of the theoretical concept is yet to be seen.

Band Protocol

Band Protocol is an oracle platform designed to aggregate and connect real-world data and APIs to smart contracts. And while the original project was abandoned last year, the core development team focused on building Band v2, called BandChain.

There are actually two different versions of BandChain, both called Guanyu. The first network is a Proof-of-Authority oracle network where the Band Foundation and select validators run seven nodes, while the second network is a Delegated Proof-of-Stake network. BandChain is a Tendermint-based blockchain using a BFT consensus algorithm and operating within the Cosmos ecosystem.

To utilize BandChain’s oracle service, users send data requests to the network by calling available “Oracle Script” smart contracts. These smart contracts are on-chain executable programs that are able to encode various data request details, such as data source APIs.

The network currently only supports free, low-quality APIs. However, support for password-protected APIs is only theoretically possible.

One of Band’s core components is built-in randomness — the protocol chooses oracle nodes at random, requiring every node to have access to the same data and network security. The oracle service is actually built on a proprietary blockchain and requires nodes to produce and validate blocks.

Band’s data feeds are currently only updated by the permissioned Proof-of-Authority version of Guanyu and lack the decentralization seen in other oracle services on the market.

Band is permissionless, built on Cosmos, and anyone can run a node. They also do not require a validator to undergo KYC to run oracles, and run on their own chain, making it easier to integrate with other chains.

The Umbrella Network

The Umbrella Network is a scalable, community-owned oracle service that set out to create a decentralized financial system. It’s a Layer 2 technology solution that achieves scalability through implementing a Merkle Tree based approach which allows scaling of data which can be cryptographically verified to be genuine. Delegation ensures all participants of the network are economically incentivized to accurately validate the data they provide.

One of the key aspects of the Umbrella Network is its focus on economical viability and scalability. To achieve this, the network greatly reduces the cost of gas by using a system of Merkle Trees to bundle multiple transactions into a single node. This allows each node to validate thousands of transactions for the price it would take to validate one transaction on other networks.

This natural advantage enables Umbrella to make 80 of the most commonly used cryptocurrency data pairs on its Layer 2 system available for free. More than 40 of the most common data pairs on the chain are updated every 5 minutes, also for free. The network will stay profitable by charging developers on a SaaS-based tiered pricing model for less common data pairs.

To create a network that’s resistant to manipulation and attacks, Umbrella has put the control of the protocol into the hands of the community. There are no pre-mined tokens and the community, which includes the public token buyers, developers, validators, and data partners, will own the majority of all publicly available tokens.

To conclude we have created a comparison table that helps you evaluate the current status of the oracle eco-system where we contrast and compare different oracles based on different parameters like speed, data they offer, costing, etc.