DeFi’s Oracles Are Too Centralized

In the world of decentralized finance, there can be no weak link.

DeFi applications are built upon the idea that a central authority is not only unnecessary, but is in fact detrimental to the efficiency, security, and accessibility of essential financial services. Centralized institutions like banks function on making a profit, often at the expense of the community. In contrast, DeFi apps are not managed by institutions, but instead are powered by a decentralized network with no single point of failure.

If DeFi is to succeed where centralized institutions have failed, the integrity of its decentralized network must be beyond reproach. Unfortunately, as it stands today, defi can’t make this claim.

One weak link remains: the oracle.

The Oracle Problem

Much has been written about the “oracle problem” in decentralized finance. To summarize, the oracle problem refers to the dilemma in which to bring real world data like asset prices on chain, defi applications must use a centralized service called an oracle.

Centralized oracles compromise the integrity of defi’s decentralized network. They can influence data accuracy and are vulnerable to attacks and technological failure. Using centralized Oracles, DeFi apps will never be able to achieve the scale to support a new financial system without risking the same critical failures of their centralized counterparts.

Moreover, many oracle service providers who claim to be decentralized — who use a network of nodes to validate data — are controlled by centralized authorities. This gives them the power to hand select who operates their nodes and influence how the network is run for their own benefit.

The oracle problem isn’t simply a decentralization problem. It’s also an ownership problem.

To maintain the integrity of defi’s decentralized network, oracles must also be community owned.

The Decentralized, Community Owned Oracle

What does it mean to be “community owned”? It means that the community, including token holders, node operators, and defi projects that utilize the oracle, all have a voice in how the network is governed.

If network nodes are selected by a central authority, then the network isn’t truly decentralized. The integrity of decentralized networks depends on their nodes being independently incentivized to accurately validate data. This will ultimately fail if a node is beholden to a higher power (centralized authority) who may want to influence results one way or another.

Instead, nodes must be owned and operated by the community.

Employing a delegated proof of stake (DPoS) consensus model is an ideal way to ensure that nodes operate independently and with integrity.

A delegated proof of stake consensus model allows all token holders within the community to elect representatives to govern the network. These representatives are beholden to the community — not investors or other private stakeholders — and are economically incentivized to validate data accurately via token payouts. If they don’t validate data accurately, they risk being replaced.

It’s a fair system that rewards good behavior (staking tokens, accurately validating data) while penalizing dishonesty and inaccuracy. But ultimately, it is a system that places power within the hands of the community. This power allows the community to decide which nodes participate in the network based on their performance. This power gives the community full governance over the network, allowing them to decide important elements like rewards, penalties, smart contract execution, delegation, and node distribution.

We must decentralize the oracle. But most importantly, governance over that decentralization must be community owned.

Oracles must function in the same way as the blockchains they serve.