KeyTango is a platform for retail investors to discover, learn and invest in DeFi products and services such as yield farming and liquidity pools.We believe that DeFi was meant to, and should be more inclusive.
You may be a crypto veteran, but a DeFi newbie. Starting today, a series of articles will break some of the key concepts of DeFi into layman terms.
Price Oracles In A Nutshell
Oracles are essentially third-party services that enable smart contracts within blockchains to receive external data from outside of their ecosystem. Oracles act as a data source that can be fed into a smart contract, one that enables them to access real-time data that isn’t on-chain yet, which is most often the accurate price of assets.
Even though oracles themselves aren’t data sources, they are layers that verify on-chain data related to real-world events and then submit the cumulative data to smart contracts.
Price oracle risk, is the risk that such price feed can be manipulated andthe wrong price is input into a smart contract, falsely reducing or increasing the price of an asset, creating an arbitrage opportunity for the manipulator. The effect of such a manipulation gets further amplified when attackers implement flash loans to exploit the arbitrage opportunity created by the price manipulation.
Most decentralized oracles use the ShellingCoin mechanism, whereby independent sources report the data without validation from other sources. Due to the absence of this contact, these sources/agents report “true” data to the best of their capabilities while expecting other sources to do the same.
This mechanism is vulnerable to various problems such as collusion between parties, signaling and even bribing. Furthermore, in the event of a hacker attacking the data feed, there is no retaliation mechanism in place. Even a single incorrect value can have significant consequences for the applications relying on the oracle.
Various DeFi protocols have launched price oracles to offer transparent pricing data to users. For instance, money market protocol Compound announced its decentralized price oracle, the Open Price Feed (OPF), in August. In the OPF, price reporters — such as cryptocurrency exchanges, DeFi protocols and OTC trading desks — can submit price data using a known public key.
Users can fetch the reported pricing data by accessing the public API of price reporters. The price oracle is decentralized, as the submission of and access to price data can be conducted without using the infrastructure of the Compound protocol.
The Growing Popularity of Decentralized Oracle Platforms
Projects such as Chainlink offer decentralized oracles that retrieve and deliver financial data for derivatives and lending. For instance, Chainlink suggests its oracles have retrieved data for over 90% of the volume of derivative lending defaults among public blockchains.
This data is adopted by DeFi derivatives providers such as Synthetix, Nexus Mutual and MCDEX, among others. Earlier this year, Coinbase launched Price Oracle aiming at reducing systemic risk in the broader DeFi ecosystem. Coinbase Oracle can be pulled in by blockchain networks and, once there, it can be merged with other data feeds used by DeFi projects.
Overall, decentralized finance has seen remarkable growth in 2020. Blockchain oracles have played an instrumental role in DeFi development, as they enhance data reliability and accuracy across various DeFi protocols.
By relying on decentralized oracle platforms, DeFi protocols can save time and resources while fostering innovation in other areas of decentralized finance. In order to reduce price oracle risk exposure, investors can use platforms that don’t rely on a price oracle, use a tamper resistant price oracle such as Uniswap V2 or use a price feed from a source with a lot of trading volume, so that the cost of manipulating its price is very expensive.
Wanna know what else is possible with Oracles? Sign up for keyTango’s beta at keytango.io, stay up-to-date on with keyTango’s latest developments, and get whitelisted for our upcoming token sale.
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