Voidugu:
I've noticed that while the atmega 328 requires a 16MHz oscillator (if i am correct), some smaller atmega chips like the attiny85 doesn't require one.
Why is that?
a) The 328 doesn't require one
b) You can choose between several clock sources. One of them is an internal oscillator.
OTOH the internal oscillators aren't very accurate, they vary with temperature and voltage. For accurate timing you need an external crystal.