UNI should be an oracle token

Source | gov.uniswap.org

Author | Vitalik Buterin

A very important component of a successful DeFi ecosystem is a highly secure price oracle. Algorithmic stablecoins (eg, DAI, RAI, LQTY), synthetic assets of any kind, mortgages, and many other types of projects rely on price oracles. Uniswap does provide a price oracle for its ERC20 token swaps, but this is not a true oracle as it does not provide price feeds for anything in the outside world. This creates a problem: Algorithmic stablecoins rely on price oracles for ETH/USD to function properly, and they specifically require USD as an off-chain fiat asset, not a price oracle for any on-chain instance of USD. Similarly, synthetic assets also require oracles that map asset prices (denominated in ETH).

I propose that Uniswap and UNI tokens can step in and provide such an oracle (e.g. modeled after Augur or UMA) specifically designed to provide a kind of price data that is large enough to make manipulation and attack extremely costly for hackers .

➤ Summary of this article

• Stablecoins need an ETH/USD price oracle (see above)

• Using ETH/USDC price oracles is not a long-term method

• Chainlink is a great project, but there is an easy alternative for high-value, high-latency acceptable use cases

• UNI could very well be such an oracle token

• More broadly, Ethereum L1 needs to keep governance minimal, but L2 should be more ambitious, and UNI can be part of that

➤ Using ETH/USDC price oracles is not a long-term method

The goal of algorithmic stablecoins is to achieve maximum censorship resistance and robustness by breaking away from dependence on the "fiat world". If this goal is not important to stablecoin users, they can avoid the technical risk of algorithmic stablecoins by using USDC directly. If this goal is important to stablecoin users, then they must avoid not only direct dependence on fiat currency markets, but also indirect dependence. Replacing the ETH/USD price stream with the ETH/USDC price stream would not achieve that goal, as such a system would ultimately still depend on USDC, which would only function if USDC still existed and could be traded freely.

Taking the median of multiple ETH/stablecoin (e.g. USDC, GUSD, USDT) exchange rates is a small improvement at best, as the traditional financial system is fairly coordinated and it is easy to support all stablecoins backed by traditional assets become less friendly. Therefore, if we want to have the algorithmic stable currency mentioned above, we need an oracle machine that provides ETH/USD.

➤ Chainlink is a great project, but there is a simple alternative for high-value, high-latency acceptable use cases

Currently, most “governance-minimized stablecoins” use Chainlink as their oracle. Chainlink is extremely valuable for many oracle use cases, but it is also a complex system with many characteristics. Its incentives are not as transparent as Augur's; in particular, there is no automatic mechanism to penalize participants for providing incorrect answers.

Just as we hope to complement MakerDAO's functionality with other stablecoin alternatives, such as RAI (disclaimer: I hold both MKR and Rai's FLX), these stablecoins seek to minimize governance, so the Ethereum ecosystem will be stronger. Likewise, we also want to complement Chainlink with a governance-minimizing alternative that focuses more on optimizing incentives and maximizing attack costs. An oracle leaning toward robustness should aim for these properties, even at the cost of longer resolution times and being limited to a certain type of data (price indices for highly liquid assets).

➤ UNI could very well be such an oracle token

Decentralized price oracles (if they want to avoid reliance on an identity layer) need to have at least one Sybil-resistant token. Token holders are asked to provide price information, and an economic mechanism is usually introduced (rewards for majority answers and penalties for minority answers).

If the majority of token holders are evil, they can successfully provide a wrong answer. At this point, it will be up to the minority token holders to create a fork of the system in which the attacker’s tokens are zeroed out and the community is persuaded to continue producing blocks on the forked chain. In other words, the consequence of this type of attack is that the total market value of the token will be halved, and other situations must be considered-there will be some very lazy token holders who will not do anything, even though they will lose tokens. Do not vote.

Therefore, for DeFi projects, if a token-based decentralized oracle machine wants to achieve stable development, it must have a token with a huge market value. The efficiency of the oracle is not important: an inefficient oracle can always be enhanced by a game mechanism that only kicks in when one party provides some value data and the other party disagrees. On the other hand, the cost of attack needs to be maximized, so the market value is the key. The two Ethereum project tokens with the highest market capitalization are LINK and UNI.

For Uniswap, backing oracles is not just a selfless act; in fact, Uniswap could benefit from a more robust and stable stablecoin ecosystem. Uniswap V3 is heavily optimized to achieve ultra-high capital efficiency for stablecoin-to-stablecoin exchange transactions, and it is likely to profit from high fees on these transactions. It would be even better for Uniswap if a large number of robust synthetic assets started appearing on-chain.

➤ More broadly, Ethereum L1 needs to keep governance minimal, but L2 should be more ambitious, and UNI can be part of it

Compared with the scope covered by previous blockchain platforms, the Ethereum ecosystem aims to be a base layer capable of accommodating more applications. Our goal is not just to support the holding and transfer of basic assets, but also a decentralized finance (DeFi) ecosystem and, increasingly, a decentralized governance (DeGov) ecosystem. There is also a huge need for sponsorship of public works in the Ethereum ecosystem.

To realize this larger vision, we need more than just "blockchain". It can be said that we need to move in the direction of the "encryption kingdom". The services provided by the blockchain ecosystem will not only be security, but also oracle machines, dispute resolution, public utility sponsorship, identity authentication, etc. But in order for Ethereum to become a stable platform, the blockchain base layer needs to uphold the principle of minimal governance. Minimal governance reassures users that the applications of their relationships will not be disrupted and that the base layer will not cause consensus conflicts and splits by adding controversial features.

Website: ethereum.cn

Original link:https://gov.uniswap.org/t/uni-should-become-an-oracle-token/11988

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