IDEAS home Printed from https://ideas.repec.org/p/arx/papers/2512.03088.html

How DeFi Protocols Choose Oracle Providers: Evidence on Sourcing, Dependence, and Switching Costs

Author

Listed:
  • Giulio Caldarelli

Abstract

As data is an essential asset for any DeFi application, selecting an oracle is a critical decision for its success. To date, academic research has mainly focused on improving oracle technology and internal economics, while the drivers of oracle choice on the client side remain largely unexplored. This study addresses this gap by gathering insights from leading DeFi protocols, uncovering their rationale for oracle selection and their preferences regarding whether to outsource or internalize data-request mechanisms. Data are collected from founders, C-level executives, and oracle engineers of 32 DeFi protocols, whose combined total value locked (TVL) exceeds 55% of the oracle-using DeFi segment. The study leverages a one-time mixed-method survey, using tailored question paths for in-house versus third-party oracle users. Quantitative answers are summarized, compared across groups, and examined through Spearman rank-order correlations to explore pairwise associations among evaluation dimensions, while open-ended responses are inductively coded into keywords and broader themes to triangulate common selection motives and switching challenges. Insights support the view that protocol choices are tied to technological dependencies, in which the immutability of smart contracts amplifies lock-in, hindering agile switching among data providers. Furthermore, when viable third-party solutions exist, protocols generally prefer to outsource rather than build and maintain internal oracle mechanisms.

Suggested Citation

  • Giulio Caldarelli, 2025. "How DeFi Protocols Choose Oracle Providers: Evidence on Sourcing, Dependence, and Switching Costs," Papers 2512.03088, arXiv.org, revised Mar 2026.
    • Handle: RePEc:arx:papers:2512.03088
    as

    Download full text from publisher

    File URL: http://arxiv.org/pdf/2512.03088
    File Function: Latest version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Jens Frankenreiter, 2019. "The Limits of Smart Contracts," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 175(1), pages 149-162.
    2. Goeree, Jacob K., 2003. "Bidding for the future: signaling in auctions with an aftermarket," Journal of Economic Theory, Elsevier, vol. 108(2), pages 345-364, February.
    3. S. J. Liebowitz & Stephen E. Margolis, 1994. "Network Externality: An Uncommon Tragedy," Journal of Economic Perspectives, American Economic Association, vol. 8(2), pages 133-150, Spring.
    4. Weber, Charles A. & Current, John R. & Benton, W. C., 1991. "Vendor selection criteria and methods," European Journal of Operational Research, Elsevier, vol. 50(1), pages 2-18, January.
    5. Cong, Lin William & Fox, Liam & Li, Siguang & Zhou, Luofeng, 2025. "A primer on oracle economics," Journal of Corporate Finance, Elsevier, vol. 94(C).
    6. Michael L. Katz & Carl Shapiro, 1994. "Systems Competition and Network Effects," Journal of Economic Perspectives, American Economic Association, vol. 8(2), pages 93-115, Spring.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Honohan, Patrick & Vittas, Dimitri, 1996. "Bank regulation and the network paradigm : policy implications for developing and transition economies," Policy Research Working Paper Series 1631, The World Bank.
    2. Slowak, André P., 2009. "Market fields structure & dynamics in industrial automation," FZID Discussion Papers 02-2009, University of Hohenheim, Center for Research on Innovation and Services (FZID).
    3. Bryan Caplan & Edward Stringham, 2003. "Networks, Law, and the Paradox of Cooperation," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 16(4), pages 309-326, December.
    4. Stavins, Robert & Jaffe, Adam & Newell, Richard, 2000. "Technological Change and the Environment," Working Paper Series rwp00-002, Harvard University, John F. Kennedy School of Government.
    5. Joel West & Jason Dedrick, 2000. "Innovation and Control in Standards Architectures: The Rise and Fall of Japan's PC-98," Information Systems Research, INFORMS, vol. 11(2), pages 197-216, June.
    6. Parsheera, Smriti & Shah, Ajay & Bose, Avirup, 2017. "Competition Issues in India's Online Economy," Working Papers 17/194, National Institute of Public Finance and Policy.
    7. Kinsey, Jean D. & Buhr, Brian L., 2003. "E-Commerce: A New Business Model For The Food Supply/Demand Chain," Working Papers 14320, University of Minnesota, The Food Industry Center.
    8. Michal Grajek, 2002. "Identification of Network Externalities in Markets for Non-Durables," CIG Working Papers FS IV 02-32, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG).
    9. Tanjim Hossain & Dylan Minor & John Morgan, 2011. "Competing Matchmakers: An Experimental Analysis," Management Science, INFORMS, vol. 57(11), pages 1913-1925, November.
    10. Steinrücken, Torsten, 1999. "Wirtschaftspolitik für offene Kommunikationssysteme: eine ökonomische Analyse am Beispiel des Internet," Ilmenau Economics Discussion Papers 16, Ilmenau University of Technology, Institute of Economics.
    11. Nicholas Economides & Lawrence J. White, 1993. "One-Way Networks, Two-Way Networks, Compatibility, and Antitrust," Working Papers 93-14, New York University, Leonard N. Stern School of Business, Department of Economics.
    12. Lawrence J. White, "undated". "Technological Change, Financial Innovation, and Financial Regulation: The Challenges for Public Policy," Center for Financial Institutions Working Papers 97-33, Wharton School Center for Financial Institutions, University of Pennsylvania.
    13. Parker Wheatley W., 2012. "Using Experiments to Illustrate the Role of Network Externalities in Technology Adoption and Industry Evolution," Journal of Industrial Organization Education, De Gruyter, vol. 6(1), pages 1-13, December.
    14. Dae-Yong Ahn & Jason A. Duan & Carl F. Mela, 2016. "Managing User-Generated Content: A Dynamic Rational Expectations Equilibrium Approach," Marketing Science, INFORMS, vol. 35(2), pages 284-303, March.
    15. Ricardo Raineri, 2004. "Telecommunication Network Competition: An Equilibrium Analysis," Econometric Society 2004 Latin American Meetings 182, Econometric Society.
    16. Prasanth Regy & Shubho Roy, 2017. "Understanding Judicial Delays in Debt Tribunals," Working Papers id:11771, eSocialSciences.
    17. Fabio Manenti & Ernesto Somma, 2008. "One-Way Compatibility, Two-Way Compatibility and Entry in Network Industries," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 15(3), pages 301-322.
    18. Xiaotong Li, 2005. "Cheap Talk and Bogus Network Externalities in the Emerging Technology Market," Marketing Science, INFORMS, vol. 24(4), pages 531-543, October.
    19. repec:vuw:vuwscr:19037 is not listed on IDEAS
    20. A. Bassanini & G. Dosi, 1998. "Competing Technologies, International Diffusion and the Rate of Convergence to a Stable Market Structure," Working Papers ir98012, International Institute for Applied Systems Analysis.
    21. Karim Jamal & Michael Maier & Shyam Sunder, 2003. "Privacy in E‐Commerce: Development of Reporting Standards, Disclosure, and Assurance Services in an Unregulated Market," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 41(2), pages 285-309, May.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arx:papers:2512.03088. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: arXiv administrators (email available below). General contact details of provider: http://arxiv.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.