Time Weighted Average Prices, Pillars of The Umbrella Network
Oracles are and always will be a hard problem to solve. Some even believe it’s the hardest problem DeFi faces.
HOW DOES THE ORACLE PLAY IN THE WORLD OF DEFI??
oracles are one of the fundamental building blocks of the entire ecosystem. They are the bridges that connect decentralized finance to the outside world. Furthermore,
An oracle is the thing that allows you to get that data into your smart contract. It either brings it on-chain for you to read from or pushes the data into your smart contract. Typically this is a third party service or something that you do yourself manually — both of these are centralized. And it’s important to be clear that using a centralized method for your oracle defeats the entire purpose of building a DeFi product. If the oracle was corrupted, it could game the system and manipulate that data or choose to censor it for its own financial gain. Decentralizing this process through which off-chain data gets used on-chain is critical to having a secure contract.
Oracle serve as important intersection points between different DeFi protocols.
- liquidations at a borrowing
- lending Dapp.
(require the prices from a trusted source to liquidate under-collateralized loans.)
There is a thriving underground industry of DeFi liquidators who are incentivized to sell off positions that are under-collateralized. These sophisticated bots use state of the art technology to search and identify such assets. The bots receive a commission when liquidations occur, making them constantly incentivized to monitor and act on such situations.
In theory, the process is well thought out and should work flawlessly in the DeFi infrastructure.
There are many attack vectors possible for those who want to attack the system, with the targeting and manipulation of on-chain asset prices being a particularly effective method to trigger a liquidation event. Essentially, anyone can manipulate DeFi prices, thanks to the existence of flash-loans which allow DeFi users to take out extremely short term loans of very large amounts of capital without depositing any collateral (provided they return the funds back into the same transaction and agree to bear a reasonable interest rate).
What Makes A Good Oracle? Here are some points to consider…
- Internal vs External: Is the oracle specifically made for this protocol/application, and thus subject to its community’s governance, or is a ready-to-use oracle system from a third party used?
- Oracle Changes: How are changes to the oracle itself decided? This includes the issuance of new contracts, changes of aggregation methodology, and in some cases complete removal of some sources. Some oracles require “admins” to make decisions.
- Choice of Calculation: Who chooses the methodology for calculation of oracle values? The models generally differ, as I explored earlier there are risks to having admins or vote hoarders determine oracle logic. Can the user choose between several on-chain feeds and aggregate them
How does The Umbrella Network plan out to solve this problem?
Umbrella network will solve this by propping it up on multiple pillars of technical infrastructure. In this post, we will introduce our first pillar of defense — Time Weighted Averages.
It’s time developers and Oracles start cooperating with each other to ensure ambiguity fades and attack vectors cease to exist. The first step needed to achieve this is to ensure that Oracles aren’t owned by large corporations, but rather by the community that uses them.
This is exactly why the UMB network is owned by the community. The network’s tokenomics dictate that the majority of the governance tokens of the protocol are owned by its community of contributors.
Please stay tuned for more updates and launches and thank you for the support!