The Importance of Price Oracles in the DeFi Industry – An Overview of Different Types and Applications

The Importance of Price Oracles in the DeFi Industry – An Overview of Different Types and Applications

##Summary:

Price oracles play a crucial role in the DeFi world. They serve as a bridge to bring data from external sources onto the blockchain. This article examines different types of price oracles and their advantages and disadvantages. Chainlink, Pyth, TWAP, the Open Price Feed and Maker DAO are some of the popular oracle solutions. However, there is no universal best solution for oracles, as each has its own limitations and advantages. It is important to understand the different oracle solutions and choose the best one for a particular crypto project.

##Introduction:

In the decentralized finance (DeFi) world, oracles play a crucial role in ensuring the accuracy and reliability of data, especially price data. Since smart contracts on blockchains do not have direct access to external information, oracles serve as a bridge to bring this external data onto the blockchain.

##What are price oracles:

A price oracle is a special type of oracle that provides off-chain (external) price information to on-chain (blockchain) smart contracts. It therefore enables the integration of external data into smart contracts on the blockchain.

##Why are price oracles so important in DeFi:

Price oracles are widely used in DeFi and play a key role in many crypto projects. For example, credit protocols use oracles to determine the right level of collateralization and initiate liquidations when necessary. Algorithmic stablecoins anchor their anchor to external assets. Synthetic assets track the prices of real-world assets to manage their on-chain synthesis. So any project that uses asset prices needs some kind of price oracle.

Since oracles are widely used in crypto projects and almost always play an important role, oracle attacks have become one of the most popular types of attacks on crypto projects.

##Types of price oracles, their advantages, disadvantages and security issues:

There are different types of price oracles, each with its own advantages and disadvantages. Here are some of the most popular solutions:

###Chainlink price oracle:
Chainlink is probably the best-known provider of oracles. It consists of a network of oracles (data feeds) that push data into the blockchain.

• Das Netzwerk besteht aus unabhängigen Betreibern, die jeden Datenfeed aktualisieren.
• Ein Smart Contract validiert und aggregiert die Daten dieser Betreiber.
• Betreiber werden für ihre Datenveröffentlichungsaktivitäten belohnt.

The data feeds have specific parameters such as the minimum number of oracles needed to update the price and the frequency of updates.

It is worth noting that Chainlink price data feeds are not available on all networks and are certainly not available for all currencies. If the required currency for a project is missing, other types of oracles must be considered.

###Pyth price oracle:
Another popular price oracle provider active on more than 12 blockchains. Pyth consists of three main components:

• Publisher, die Preisdaten liefern.
• Pyth’s Oracle-Programm, das Daten von Publishern aggregiert.
• Consumers, Protokolle, die Preisdaten anfordern.

Pythnet, an application blockchain powered by Solana, is used for data aggregation. Pythnet combines publisher prices to produce a single aggregate price. The aggregated prices are then transmitted to target chains via the Wormhole Protocol, and the consumer contracts retrieve the prices from on-chain storage.

###TWAP oracle:
TWAP oracles calculate the average price of a specific asset over a specific period of time. These oracles work based on the principle of averages over a set period of time. Deploying TWAP oracles securely is necessarily challenging, and their resilience to attacks hinges on several variables including the arbitrage mechanism’s effectiveness, the liquidity pool’s capital and the network’s consensus mechanism, among others.

• Obwohl TWAP-Orakel eine gewisse Funktionalität bieten, sind sie nicht immun gegen Bedrohungen und Probleme bei der Implementierung.
• Der Einsatz von TWAP-Orakeln ist complex und ihre Resilienz gegen Angriffe hängt von unterschiedlichen Faktoren ab.

Although TWAP oracles are seemingly simple in functionality, their secure implementation requires a thorough understanding of their complexities and potential vulnerabilities. Their use as part of a broader Oracle strategy can improve the security and functionality of blockchain projects.

###Open Price Feed:
The Open Price Feed oracle was developed by Compound. The main idea of ​​the oracle is to combine prices from different sources – initially Chainlink and Uniswap markets.

• Das Open Price Feed-Orakel verwendet einen speziellen Vertrag, der eine vertrauenswürdige Quelle ermöglicht, Preise zu aktualisieren.
• Sobald der Preis aktualisiert ist, wird er mit einem Ankerpreis aus dem Uniswap-Pool verglichen.
• Wenn der Preis mehr als die festgelegten Grenzen vom Ankerpreis abweicht, wird das Preisupdate verworfen.
• Der Ankerpreis wird mit der oben beschriebenen TWAP-Methode abgerufen.

The Open Price Feed defends itself against incorrect data provided by external price data providers. However, the downside is that if there are frequent price fluctuations, the TWAP price may not be updated and the actual asset price provided by an external source will be discarded.

###Maker DAO oracle:
The Maker DAO oracles are one of the oldest oracles in the EVM ecosystem. Similar to Chainlink and Pyth, Maker uses an off-chain network where price transmitters provide asset price valuations.

• Das On-Chain-Orakel-Modul besteht aus zwei Hauptverträgen: Median und OSM (Oracle Security Module).
• Das ‚Median‘-Komponente bietet den Referenzpreis für Maker. Sie ermittelt den Median der empfangenen Preise und speichert den Wert.
• Der ‚OSM‘-Vertrag stellt sicher, dass die gespeicherten Preiswerte erst nach einer bestimmten Verzögerung genommen werden dürfen.
• Die Nutzung dieses Preis-Orakels ist nur für whitelisted Verträge möglich.

It should be noted that this price oracle is only available for certain contracts.

##Conclusion:

Price oracles are an essential part of the DeFi ecosystem and the security of numerous crypto projects depends on them. Unfortunately, there is no universal best solution for a price oracle - each oracle has its own limitations, advantages and disadvantages.

That is why it is important to know the available oracle solutions and choose the best solution for a particular crypto project.

##Frequently Asked Questions (FAQs):

In which crypto projects can price oracles be used?
Price oracles can be used in a variety of crypto projects, especially those in the DeFi sector. Example use cases include lending protocols that need to ensure correct collateral levels, algorithmic stablecoins that need reliable price anchors from external assets, and synthetic asset platforms that need to track RWA prices to manage their on-chain synthetics.

Is there currently a best solution for oracles?
No, there is currently no universal best solution for oracles. Each oracle has its own advantages and disadvantages depending on specific use cases, security models and network compatibility. It is therefore crucial to understand the available oracles and choose one that best suits the needs and goals of a particular crypto project.

What are the dangers of using TWAP oracles?
Although TWAP oracles offer certain advantages, such as mitigating immediate price manipulation by averaging the asset price over a defined period of time, they are not immune to threats and implementation is challenging. The security of TWAP oracles depends on various factors such as the effectiveness of the arbitrage mechanism, the capital of the liquidity pool and the consensus mechanism of the network, among others. They can be effectively used in conjunction with other types of oracles to ensure greater security and functionality in a multi-oracle strategy.