The Bank for International Settlements has released a bulletin examining the problems with “oracles” in decentralized finance protocols and concluded that basic changes are needed.
The need for an oracle in decentralized finance 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.Decentralizing an oracle could involve verification, a reputational system and multiple sources, the writers speculated.
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.
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