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DeFi’s Oracle Problem, with ChainLinkGod

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While most commentators are still trying to get to grips with what Decentralised Finance (DeFi) actually means and how the mechanism works, others have been busy with other projects. One of these projects, is how, at its heart, Decentralised Finance needs ‘oracles’ in order to access the real-time price of assets.

One of the firms making headlines in this space is Chainlink. An investment opportunity to many, trusted partner to some, and a source of excellent engineering tutorials to others:

In the video, Patrick Collins, Developer Advocate at Chainlink, makes the argument that when Blockchain uses a single node to gain data, it becomes no better than a regular contract. And, to highlight his point, at the end of the video Collins closes with:  “Do not use a single centralized oracle EVER.” For more from Collins about how he is helping build an awesome technical community, he recently spoke at Chainlink’s Hackathon.

Chainlink is important for the DeFi ecosystem as it supplies much of the community (like Aave and yearn.finance) with live prices in order to adjust lending and borrowing rates. It is also a partner to Binance and Polkadot, within the ecosystem. Outside of blockchain, Google Cloud, SWIFT and Intel are also partners.

Chainlink is touted by many to be one of the blockchain solutions that will reach corporate adoption quickest. Rory Piant, Director of Community at Chainlink Labs, has highlighted how “without the community, it doesn’t matter what you build, because nobody will know about it.” The Chainlink Ecosystem is a big project, and builds on the structure of the DeFi ecosystem in many ways.

The strength and reach of Chainlink has not gone unnoticed by Rune Christensen, the founder of Maker, arguably the pioneer of the space.

The Oracle Problem

First of all, the Oracle Problem afflicts ALL blockchains, whether that be Bitcoin, Ethereum or Polkadot. This is because smart contracts do not have access to any real data. They need help through ‘oracles’, of which there are two distinctive types.

Ethereum $ETH introduced programmable smart contracts. It’s the ability of smart contracts to access data that is arguably causing the rise in popularity of DeFi that we are seeing today. With time the data will become richer and better, as DeFi gains even further notoriety.

Centralised oracles function as a single entity providing data from an external source to a smart contract operating with a set of security features. Like traditional finance, though, there is only a single node, making it vulnerable to being attacked.

On the flipside, decentralised oracles rely on multiple external sources to verify data provided to the smart contracts. The smart contract queries multiple oracles to determine the validity and accuracy of the data, giving rise to the ‘consensus oracle’ expression. Decentralised oracles, much like blockchain, aim to achieve ‘trustlessness’, distributing the trust between many participants rather than an institution or just one individual.

The Oracle Problem is the challenge behind ensuring oracles are not compromised. If they are, all the data will be compromised leading to a loss of stability or ‘trust’ within the network.

Maker and the Chainlink community

Sergey Nazarov, the CEO of Chainlink, is a huge personality within the blockchain community. His position in decentralised finance is almost on a par with legends such as Rune Christensen, the founder of MakerDAO. Both organisations (Chainlink and Maker) have their own communities, with similar ideologies, but with some big differences too.

Today, the DeFi ecosystem has just over $55 billion locked in (Total Value Locked TVL). When the Maker and Chainlink communities started off this number was substantially lower, not yet hitting $500 million TVL. Showing growth potential of over 1000% in just over an 18 month period, it might be hard to know who all the members of the community are. Many of them must be new, having joined during the pandemic when DeFi first started its climb to $10 billion last summer.

New or not, these people are now a powerful voice within the DeFi community. And, this weekend, many of them were being very vocal.

Nazarov’s handle on Twitter is not @ChainLinkGod.eth 2.0, however the accusation was initially raised by this profile:

On Friday last week ChainLinkGod.eth 2.0 had been highly critical of some of MakerDAO’s oracles. By Saturday the situation had diffused somewhat. A formal response from MakerDAO was part of the reason the situation had settled down. However, in a world built by community-centric activity it was quite surprising to see at the commencement of the response the following words from Niklas Kunkel, Head of Backend & Oracles at MakerDAO:

“While we tend to choose to ignore the noise from the Chainlink community, we feel obliged to react in this instance due to the gravity of the accusation.” Kunkel explains, “MakerDAO does not participate in nor benefit from liquidations in neither the Maker Protocol nor other protocols.

“The fact that these slanderous accusation have been repeated not once, but three times, by the official Chainlink evangelist, reflects poorly on the integrity of the Chainlink community.

“ChainLinkGod has dug up an old, known, and publicly disclosed issue that has since been remediated, and that is about to be permanently fixed by a production upgrade that is in the final stage of its roll-out.

“The irony is that while the Maker Protocol was able to easily fix the issue, the Chainlink architecture is built in such a way that this cannot be avoided.”

Amongst the comments ‘CodeForcer’ was quick to respond, accusing Maker of a lack of transparency as well as a lack of urgency in fixing the problem in the first place. And while we may not know who exactly ‘CodeForcer’ is, ChainLinkGod.eth 2.0 ended up apologizing in the end.

What is Miner Extractable Value (MEV)?

There are other aspects of the debate that should be raised, more specifically how ChainLinkGod.eth 2.0 came to the conclusion that MakerDAO’s oracles were effectively extracting MEV from protocols through permissioned liquidations.

MEV refers to the amount of profit miners can extract from reordering and censoring transactions on the blockchain. A large percentage of extracted MEV comes from DeFi activities, whilst half the revenue made by the miners is from transactions.

Arbitrageurs and liquidators are needed to help maintain healthy and solvent protocols, as well as maintaining the crucial balance between the collateral and the issued assets. However, there are also now many specialised bots operating in the Ethereum mempool, many of whom deploy strategies to siphon profit from traders, and others performing transactions.

Flagging and questioning any risks to how DeFi works and how the ecosystem is developing, is a clear part of how the community works. Self-policing some might call it.

Decentralised Finance is about Win-Win for all participants, so at the slightest sign of Win-Lose, the community reacts. If you needed a reminder about how decentralised the DeFi community really was, then this short story should give you some insight. And some hope for the future.

Author: Andy Samu

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