According to Buterin, a highly secure price oracle is a vital ingredient for any successful decentralized financial ecosystem.
In a post for the Uniswap Governance Forum, Ethereum co-founder Vitalik Buterin suggested that the UNI token is well poised as an oracle token. According to Buterin, a highly secure price oracle is a vital ingredient for any successful decentralized financial ecosystem.
Additionally, Uniswap does provide an ‘Oracle’ for the price of ERC20 tokens traded in its system. However, according to him, this is not a true oracle as it is not backed by anything in the outside world, thus prone to attacks if the majority of the token holders are malicious.
“I recommend that Uniswap and the UNI token step in and provide such an oracle (eg. modeled after the Augur or UMA design), specialized to providing price data that are robust and extremely costly to manipulate and attack,” he explained.
Buterin Speaking on Oracle for DeFi Ecosystem
He further decided that a token with large market capitalization is a must ingredient for a robust token-based decentralized oracle used by any decentralized financial ecosystem.
“Efficiency of an oracle is not important: an inefficient oracle can always be augmented with a game where one party claims a value and only if another party disagrees is the oracle actually called. Cost of attack, on the other hand, is essential to maximize, and thus market cap is key. And the two Ethereum project coins out there with the highest market caps are… LINK and UNI,” he noted.
He however said Chainlink lacks in some aspects required for a proper oracle to operate successfully in the DeFi ecosystem. “Chainlink is really valuable for many oracle use cases, but it is also a complex system with many features. Incentives are not as clean as they are in eg. Augur; in particular, there is not an automated mechanism by which participants who provide wrong answers get penalized,” Buterin noted.
For the price of ETH/USD to function, algorithmic stablecoins need a reliable oracle source. An algorithm stablecoin is one that does not depend on a physical fiat to back its price but an automated system to keep the price stable.
Additionally, an oracle is required by synthetic assets for the price of Ethereum denominated in whatever the asset they are mirroring. An oracle that provides off-chain data has been identified as key to the decentralized financial ecosystem, despite the DeFi advocating for data decentralization.
In his suggestions, Buterin highlighted that Ethereum layer 1 needs to remain, governance minimalist, whilst the layer 2 protocol can go for more ambitious tasks. Whereby, he suggested that Uniswap (UNI) token can be used in the layer 2 ambitious programs.
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