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‘Pure’ DeFi has little chance for real-world use because of need for oracles: BIS

The Cointelegraph ​

Cryptocoins News / The Cointelegraph ​ 121 Views

According to the Bank for International Settlements, a centralized oracle based on trust is the only option for DeFi, and variations of that model do exist.

The need for an oracle in decentralized finance (DeFi) is a major impediment to adoption in the real world, according to the authors of a Bank for International Settlements bulletin. The problems with oracles are both practical and principled, and the study’s authors saw no way around them.

An oracle is a third party that provides real-world data flowing to or from a DeFi protocol. An oracle is centralized by nature, and its presence means a protocol is not fully decentralized — if that is tolerated, then trustlessness is lost, the authors said. That is likely to be a fatal flaw for use with real-world assets, the authors wrote.

Related: OriginTrail on AI, real-world adoption and the value of knowledge: The Agenda podcast

Decentralizing an oracle could involve verification, a reputational system and multiple sources, the writers speculated. That would add layers of complexity and diminish the efficiency of the system. Issues of trust and governance would remain.

The anonymous nature of DeFi makes it hard to identify bad actors in cases of oracle manipulation, and:

“The obvious solution of increased regulation and supervision runs counter to the decentralisation ethos underpinning crypto DeFi.”

That regulation is not currently in place in any case, the authors noted. The irreversibility of transactions in DeFi also increases the amount of risk in the system.

Related: Seda co-founders discuss intersection of oracles and multichain

Trust issues are not a matter of principle for oracles. Oracle manipulation hacks occur on a regular basis. It was seen as recently as August in the Magnate Finance rug pull.

One solution to the oracle problem is to create a “centralised system whose bedrock is trust,” the authors said, but “when this trade-off is understood, the future of DeFi in its purest sense looks bleak.”

The study noted that companies such as Chainlink provide information  DeFi protocols. Chainlink claims to have developed “a network of decentralized oracle networks” with security measures tailored to each use case. Its Cross-Chain Interoperability Protocol uses the Swift network’s centralized messaging infrastructure to connect with clients, however.

Magazine: Can blockchain solve its oracle problem?


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