Financial and Informational Integration Through Oracle Networks

Oracles are software components that enable data exchange between siloed blockchains and external environments, enhancing smart contract capabilities and platform interoperability. Integration through oracle networks for blockchain and DeFi platforms allows them to be informationally and financially connected to other blockchain ecosystems and off-chain environments. Using hand-collected data on hundreds of DeFi protocols and data from the market for decentralized oracle networks (DONs), we document that oracle integration generally leads to positive financial and economic ramifications. Additionally, our initial evidence suggests that symbiotic gains from enhanced interoperability between protocols on a given chain and, depending on the mass of integrated protocols, among integrated chains, translate to positive network effects. Moreover, oracle integration appears to improve risk-sharing without significant contagions; integrated protocols appear more resilient than nonintegrated protocols during times of crisis. We draw parallels between oracle integration and international economic and financial integration, offering hopefully timely insight for regulators, entrepreneurs, and practitioners in the emerging space blockchains, DeFi, and Web3 ecosystems