Earlier this year, in May, the cryptocurrency world stood in shock as one of the most successful blockchain projects in the past year crashed to “effectively” zero. By now, most of you reading must have heard of the “incredible rise and fall” of Terra blockchain, alongside its native tokens, LUNA and UST stablecoin. A once $40 billion market cap cryptocurrency and top-10 crypto, LUNA crashed in May 2021, falling from highs of $80 to a few cents in less than three days.
Well, the cryptocurrency market has been known for its volatility, and the current drawdown in price is no different. However, such extreme volatility, as is the case with Terra, in times of a death spiral, as we are in, which pushes a project into oblivion, is something that needs to be handled with far more care.
While a lot of loopholes were left open by the project, the decentralized oracles connected to the Terra blockchain played a role in the failure of Terra, many of them exacerbating the losses for investors.
Clearly, decentralized oracles were exposed during this time and the technology shows a great need to be reactive and robust enough to match the volatility in the markets and keep up with ever-changing data without impacting its accuracy.
Additionally, decentralized oracles should be secure enough to prevent any manipulation and discrepancies in the actual price of the tokens and the price reported to their respective platforms. The Terra debacle could be handled better with reliable and accurate oracles.
In this piece, we aim to discuss the important role of decentralized oracles in the crypto market, especially during extreme market volatility, and how they protect investors and protocols from crashing into oblivion.
Decentralized oracles: A broken-working system
As discussed above, the crypto market’s volatility is a risky affair for investors, and in times such as the current bear market, the risk balloons over. Since May, the crypto market has witnessed wild volatility with the net valuation of the token prices fluctuating anywhere between 5%-15% on a daily basis. As the volatility grew, discrepancies in the price across oracles were evident.
Apart from the LUNA case, in June, there were other major incidents across the crypto market. In May, the gap between the reported price of the assets underlying LUNA Classic, the sequel to LUNA, and its synthetic assets on the DeFi platform Mirror Protocol were wildly different. This led to many arbitrageurs exploiting this monetary differential, effectively losing over $2 million for the protocol.
Less than a week before the Mirror protocol debacle, Inverse Finance, Ethereum-based decentralized finance (DeFi) protocol, lost $1.26 million in Tether (USDT) and wrapped Bitcoin (wBTC) in a flash loan exploit, a couple of months after losing $15.6 million, both as a result of price oracle manipulation. Other DeFi platforms such as Venus Protocol and Blizz Finance have too faced exploits, with several more going under the radar for price oracle exploits.
The rising solutions to decentralized price oracle exploits
As the decentralized finance (DeFi) market targets to go back to its all-time highs and grow as a global challenger to traditional finance, more needs to be done to ensure the decentralized oracles are always accurate. The industry, at its base, needs to have precise price feeds supplied by oracles which are completely decentralized and cannot be manipulated.
One of the rising solutions is QED, a decentralized oracle protocol with a robust economic model that connects blockchains, smart contract platforms, and off-chain data resources. The platform achieves trustlessness by distributing data points among multiple entities and modeling the blockchain network. QED makes use of external collateral instead of native tokens as incentives which ensure data is honestly and effectively reported across all oracles. This makes it incredibly difficult for price oracles to be exploited, and the project was one of the first to predict the death spiral of LUNA.
Another solution worth considering is API3, a project that aims to address the price oracle exploit issue by establishing decentralized APIs that make it simple for blockchains to access off-site data. The project simplifies its oracles by generating decentralized APIs that come directly on the blockchain. They combine different operators enabling API providers to host the oracle nodes directly, promoting a direct connection between the blockchain and data sources. More protection is provided by dAPIs, which likewise deliver accurate data while shielding API providers from nefarious third parties.
Finally, Witnet is also a possible solution to oracles. The decentralized oracle network connects smart contracts with real-world data sources, affording third parties the ability to record info that may have been issued by any web address at any given point of time, that too with verifiable proof of the data’s veracity.
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