ORACLES

Instructors: Andreas Park and Zissis Poulos

Agenda for the presentation

What is "off-chain" reality?
How can smart contracts learn about it?
The Oracle problem and solutions

What is "off-chain" reality?

Smart contracts need data

Decentralized exchanges
Token programming/management

Lending/Derivatives
Prediction markets
Insurance
Betting

NFTs???

How do we feed external data to smart contracts?

Trust a third party to write the data
- Goes against decentralization
- Natural failures
  - link goes down
  - website goes down
  - API fails etc.
- Malicious
  - betting outcome manipulation
  - insurance fraud
  - DeFi pool exploits

The Oracle Problem

Do it in a way that respects decentralization and is failure-resistant

<standings: 7,3,8,4,2,1,6,5> + digital signatures

The Oracle Problem

Do it in a way that respects decentralization and is failure-resistant

Disagreement?

Majority Vote

The Oracle Problem

Do it in a way that respects decentralization and is failure-resistant

Multiple Values?

Report Median

1 ETH = $4780

1 ETH = $4789

1 ETH = $4781

The Oracle Problem

Do it in a way that respects decentralization and is failure-resistant

1 ETH = $4780

1 ETH = $4789

1 ETH = $4781

DEXes can be used as on-chain price oracles

Time-Weighted Average Price (TWAP)

Challenges

Participation incentives?
- rewards, payments...

Oracle nodes form their own ecosystem

Incentives for honest reporting?
- penalties, collateral...

Reputation?
- Uptime, correctness, penalty history, collateral amount....

Fee collection from dAPPs
Nodes stake LINK
- More LINK staked more jobs taken

staked LINK can be slashed

Chainlink

Chainlink Market

https://market.link/overview

Arbitration?
- Tier-2 high-stakes oracle network
- Chainlink uses zk proof by DECO

Chainlink Flow

https://blog.chain.link/understanding-the-security-impact-curve-and-future-fee-opportunity/

Does an oracle system need its own token?
- Control over tokenomics, development funding etc
- Integration/Interoperability with multiple blockchains
- But also, put yourselves in an attacker's shoes:
  - Would you rather invest (supply as collateral) the oracle's token or ETH in order to attack the oracle network?

Oracle nodes form their own ecosystem

Other applications

Off-chain computation

Verifiable randomness

Cross-chain token wrapping

Example Oracle Jobs

Price feeds
Random number generator
Liquidations
Rebalancing portfolios
Rebase token supply adjustments
Auto-compounding
Limit orders
Proof of Reserves
Aggregation of data from multiple oracles
Explicit user requests

Oracle manipulation

Centralized off-chain oracles
- Synthetix, June 2019
  - fault in central oracle -> price x1000 -> exploit

On-chain oracles
- bZx, February 2020
  - Flash loan -> inflate sUSD price on Uniswap
  - deposit sUSD on bZx -> borrow x2 more than they should
  - abandon the now underwater loan
  - net profit 600K

Generally, "thin" liquidity in a pool makes it prone to epxloits