In a post on the Uniswap governance forum, Ethereum co-founder Vitalik Buterin has put forward his thoughts on why the UNI token would be well suited as an oracle token.
On May 12, Vitalik Buterin detailed the importance of accurate price feeds and oracles in the decentralized finance (DeFi) sector. He stated that while Uniswap does provide an oracle for the price of ERC-20 tokens traded on the decentralized exchange (DEX), it’s not a true oracle as it does not provide prices for anything in the outside world such as fiat currency;
“This is a problem: algorithmic stablecoins need an oracle for the price of ETH/USD to be able to function, and they specifically need an oracle for USD the off-chain fiat asset, and not any specific on-chain instantiation of USD.”
Synthetic assets also need accurate oracles for the price of ETH, so Buterin made the recommendation that Uniswap and the UNI token step in to provide this.
Complementing Chainlink
Buterin went on to state that most “governance-minimized stablecoins” use Chainlink as their oracle at the moment. However, Chainlink’s complexity may be a drawback in this case, as there is no automated penalty mechanism for the provision of wrong data.
Complementing Chainlink with a more minimalist alternative that is more focused on optimizing incentives and maximizing the cost of attack would be a good way forward.
Buterin explained that decentralized oracles are susceptible to attacks if the majority of token holders are corrupted. This leaves the minority to hard fork the network at a cost of at least half of the market cap.
“For this reason, a robust token-based decentralized oracle for a DeFi project must first and foremost be based on a token with a large market cap.”
Maximizing the cost of attack is essential, and the two highest market cap Ethereum-based tokens out there are LINK and UNI, he added.
More value for Uniswap
Buterin went on to explain that Uniswap benefits heavily from a robust stablecoin ecosystem, so supporting oracles would be altruistic for the protocol.
“Uniswap v3 is heavily optimized toward ultra-high capital efficiency for stablecoin <-> stablecoin trades, and is likely to earn very high amounts of fee revenue from these trades.”
Additionally, if volumes for synthetic assets increase on-chain, it could be even more value for Uniswap, he concluded.
Uniswap founder Hayden Adams did report that its liquidity provider daily fees have surpassed those of bitcoin, so adding value is clearly the primary driver for the platform.
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