What is an oracle network, and why use one instead of a single oracle?

One oracle, one point of failure

A centralised oracle is run by one organisation.¹ It can be efficient, and may suit data that its owner publishes directly and signs.¹

But ethereum.org lists real downsides. There is no way to confirm that its data is correct, and even well-known providers can go rogue or be hacked.¹ If the provider shuts it down, or a hacker hijacks it, contracts that rely on it are at risk.¹ And paying an oracle for correct data does not guarantee honesty.¹

Many oracles that must agree

A decentralised oracle uses many participants in a peer-to-peer network. They agree on the data before it is sent to a contract.¹ In practice, ethereum.org says, decentralisation is a spectrum.¹ Some networks let anyone join, but have an owner who approves and removes nodes.¹

Chainlink's 2021 whitepaper calls its design a decentralised oracle network, or DON: a network run by a committee of Chainlink nodes.³ For a price feed, it says the network typically gets prices from several sources, such as exchanges, and sends the median.³

Pyth's documentation says its prices come from more than 120 "first-party" providers. These include exchanges, banks, trading firms and market makers.⁴ It says its system takes the median, which resists outlier data from any one publisher.⁵ Its upgraded contracts accept an update only when at least 3 of 5 routers have signed it.⁵

Ways networks keep nodes honest

• Combining answers. Networks such as Chainlink's Offchain Reporting and Witnet combine node answers into one value, such as a mean or a median.¹
• Staking. Some networks make nodes post a deposit. It can be taken away, or "slashed", if they report bad data.¹ Chainlink's 2021 whitepaper said staking would play a key role in Chainlink.³
• Proofs. Some use cryptographic proofs that data came from the right website and was not changed after it was fetched.¹
• Track records. Nodes often sign what they report. Users can then check each node's history and avoid unreliable ones.¹

The limits of a network

Many nodes don't help if they all read the same source. ethereum.org says that network has the same problem as a single oracle.¹

Staking can't stop every shortcut either. Nodes can copy each other's answers, or follow the majority without checking for themselves.¹

And a network can faithfully report a price that was itself pushed around. Chainlink's documentation says market conditions can move prices in ways its node operators can't control.⁶ It warns that assets with low liquidity are the most vulnerable to market manipulation.⁶ Lesson 5 shows what that looks like.