The Oracle Debate: How Should DeFi Protocols Source Price Data?

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In Brief
  • Using low quality oracles could cause problems argues the Chainlink founder.

  • Data sources have a manipulation cost according to Uniswap's founder.

  • DEX data may soon be more relevant than that from centralized exchanges.

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A debate has begun on crypto Twitter over the use of price oracles for DeFi protocols.

Chainlink is in one corner, explaining why using one or low-quality DeFi sources is a bad idea. Uniswap is in the other and its founder begs to differ.

It all began with Chainlink’s Sergey Nazarov who posted a blog on the risks of improperly leveraging oracle flexibility when sourcing data. Using just one price source could be problematic, as the tech entrepreneur explains:

“DeFi protocols should avoid using a single exchange or even just a few exchanges as their price source, regardless of whether it’s an off-chain exchange that seems reliable and/or an on-chain DEX.”

Mixing DeFi Data Also Dangerous

He added that oracle networks pulling price data from a single exchange have no protection against exchange downtime, flash crashes, and price manipulation. Additionally, they also have extremely limited market coverage.

However, there are also issues with oracles that pull data directly from preselected exchanges. They are vulnerable when volume shifts to new exchanges that were not included in the original aggregation process, he explained.

Using multiple different oracles together to create price updates sounds like the solution but there may be discrepancies between the quality of the data which could also cause problems.

The Chainlink founder concluded with a recommendation to use the project’s own superior quality oracles over mixing sources with “lower quality” alternatives.

The Counter Argument

Arguing against this notion was Uniswap founder Hayden Adams who said the number of unique price sources is quite meaningless on its own.

He added that it’s not possible to directly compare manipulation resistance of entirely on-chain oracles that pull data from a DEX with something like Chainlink that reports off-chain data.

Adams argued that the cost of manipulating price feeds on Uniswap is lost to arbitrage by moving the average market price across the period.

Chainlink, on the other hand, has a manipulation cost that arises from corrupting enough of the people who are reporting prices or manipulating prices on the exchange, he added.

The source of the data is also pretty important he stated, adding,

“As DEX continues to eat CEX, CEX data will continue to decline in relevance”

He said that it’s still very early with automated market makers (AMM) but they will eventually be way more expensive to manipulate than centralized exchanges.

Knowing that there was likely to be backlash from the phalanx of Chainlink aficionados, the Uniswap founder wrapped up the conversation:

“Lastly, I’m going to be harassed and attacked for weeks for criticizing Chainlink, despite this being a mostly technical / opinion post.”

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Martin has been writing on cyber security and infotech for two decades. He has previous trading experience and has been actively covering the blockchain and crypto industry since 2017.

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